Guest Author - Mary Salzman

A business owner recently asked me this question regarding entering vendors and vendor bills in his accounting software program - "Why should vendor invoices be entered into my accounting program as they are received? Can't I just write a check through the system when paying the bill to record the expense?"

Vendors are your business' provider of goods and services. The goods can be inventoried raw materials that are further processed by your company into a product. Goods can also be finished items purchased from a wholesaler that your business marks up and sells to customers. Marked up goods are also inventoried by your business prior to sale to your customer.

Services include legal and accounting fees, rent and utilities. It is not appropriate to enter these types of services into your inventory account. However, early payment of services can affect your asset account - Prepaid Expense.

When properly entered into an accounting system, transactions with your goods vendors affect the balances of the accounts payable account, your inventory account and various expense accounts.

The question poised above harkens back to the difference between the cash and accrual method of accounting. It also hi-lights the difference in expense treatment between service, merchandising and manufacturing businesses.

When vendors bills are not recorded when they are received, there is no effect on the accounts payable account. You are existing in a cash based environment. Why is this not particularly good? Besides the fact that for tax treatment it might not be allowed, there is no matching of revenue and expense.

Non service type businesses will not have an accurate snap shot of their business through either the income statement or balance sheet unless vendor invoices are recorded when received, regardless of when they are paid, thus affecting the accounts payable balance sheet account.

Straight up service type businesses such as a lawn mowing business, should have little difference in reporting using the cash or accrual method. This is due to the fact that most of their typical expenses are for immediate consumption.