What are loans payable?
Almost all companies work with loans payable. For example, firms charge salaries on the last day of the month. At the same time, the labor law allows one to issue a salary payment within 15 calendar days after the end of the month. From the moment of accrual to the day of the issue, the company will have a debt to employees.
Loans payable definition
Loans payable definition is easy to remember. Loans payable are debts to be paid. Accounts payable arise when the goods (works, services) have been received from the supplier, and the funds for them have not yet been paid.
On the one hand, loans payable represent funds raised for business activities, and, as a rule, without paying interest. This is the positive side of loans payable.
At the same time, overdue loans payable may lead to the need to pay penalties, bring lawsuits, and in the worst case, declare the company bankrupt. Evasion of payment of loans payable is a criminal offense.
Loans payable that cannot be recovered due to the expiration of the limitation period are written off to increase the financial result. Now, you know an answer to “What are loans payable?”.
How to work with loans payable
The analysis of loans payable is aimed at determining the company’s ability to repay it, i.e., its solvency is analyzed.
For this purpose, liquidity ratios are calculated, representing the ratio of current assets to short-term liabilities (liquidity ratios differ by the composition of assets in the numerator).
The value of the liquidity ratio that is less than the accepted standard indicates possible difficulties in paying off short-term accounts payable. The higher the value of the liquidity ratios, the higher the solvency of the enterprise.
Debt, referred to as accounts payable, occurs in accounting when the company purchases any goods (services, works) from a third party. In this case, these organizations acquire the status of suppliers. Internal relationships also form the organization’s loans payable. This is, for example, unpaid staff salaries.
Thus, loans payable is a certain type of debt that arises on a contractual basis. For example, your organization purchases components from a third party to produce its own products. Their cost will form loans payable.
The following types of such debt are defined by law:
- debts for received products that are repayable within the terms specified in the relevant contracts;
- for services rendered (goods delivered, work performed) that have already expired;
- employees of the company by salary;
- making payments to various extra-budgetary funds.
Existing loans payable are accounted for in accordance with the current regulations in specific accounts, each of which is intended for certain types of such debt for subsequent reflection in the accounting reports.
Therefore, the definition of loans payable includes not only those payments that have already passed due dates but also the company’s current obligations to creditors.
Loans payable are the existing obligations of the organization that it is obliged to repay in full within the specified time frame. This column in the reporting sets the main expenses of the company for current activities.