Part 4   -  Determine Your Accounts Payable on Purchases

An Account Payable on Purchases is a short-term liability a company incurs when it purchases inventory (products) on credit. In essence, accounts payable on purchases refer to the amount of money a company owes its supplier(s) for product/inventory. Your task is to forecast the amount of money your company will owe  supplier(s) at the end of each forecasted period (IE at the end of each forecasted business year). In our example, Murray's task is to forecast the amount of money he will owe his supplier on December 31, 200X and on December 31, 200Y (IE the end of each forecasted period or business year). The following formula is used to determine a company's forecasted ending balance in its Accounts Payable on Purchases.

Lets now calculate Murray's Forecasted Accounts Payable on Purchases for December 31, 200X. As the formula implies, we need three pieces of information - Murray's total forecasted purchases for 200X, his total forecasted payment on purchases during 200X, and the amount he owed his supplier at the end of 200W. The first two pieces of information have already been calculated in Part 3 of this Budget entitled, "Determining When You Will Pay For Your Monthly Purchases". Below summarizes these calculations.

As you can see, Murray's Total Forecasted Purchases for 200X is expected to be $14,592. In addition, Murray's Total Forecasted Payment on his Purchases during 200X is expected to be $11,856. Once again, these numbers were taking from Part 3 of this Budget entitled, "Determining When You Will Pay For Your Monthly Purchases".

The final piece of information required to determine Murray's Accounts Payable on Purchases is the amount he owed his supplier at the end of 200W. Since Murray's first month of operation is scheduled for July of 200X, he would not have purchased any inventory in 200W and therefore, he would not have owed his supplier any money at the end of 200W.

Now Murray can use the formula to calculate his forecasted Accounts Payable on Purchases for December 31, 200X.

As you can see, on December 31, 200X, Murray will owe his supplier of diskettes $2,736 ( IE Accounts Payable on Purchases). The Accounts Payable on Purchases ($2,736) will appear on Murray's December 31, 200X Forecasted Balance Sheet under the Current Liabilities section.

Lets now calculate Murray's accounts payable on purchases for December 31, 200Y. Once again, we need three pieces of information - Murray's total forecasted purchases for 200Y, his total forecasted payment on purchases during 200Y, and the amount he anticipates to owe his supplier at the end of his 200X. The first two pieces of information have already been calculated in Part 3 of this Budget entitled, "Determining When You Will Pay For Your Monthly Purchases". Below summarizes these calculations.

As you can see, Murray's Total Forecasted Purchases for 200Y is expected to be $27,113. In addition, Murray's Total Forecasted Payment on Purchases during 200Y is expected to be $26,021. Once again, these numbers were taking from Part 3 of this Budget entitled, "Determining When You Will Pay For Your Monthly Purchases".

The final piece of information required to determine Murray's Ending Accounts Payable on Purchases is the amount he anticipates to owe his supplier at the end of 200X (IE Account Payable on Purchases as of December 31, 200X). Recall from above, Murray calculated this amount to be $2,736.

Murray can now use the formula to calculate his Forecasted Accounts Payable on Purchases for December 31, 200Y.

As you can see, on December 31, 200Y, Murray will owe his supplier of diskettes $3,828 (IE Accounts Payable on Purchases). The Accounts Payable on Purchases ($3,828) will appear on Murray's December 31, 200Y Forecasted Balance Sheet under the Current Liabilities section.