3 Reasons to Record Supplier Invoices That You Don't Want to Pay
In the course of running a business, you're going to purchase goods and services from a supplier. That supplier will send you an invoice which you will record in your accounting software.
If you're unhappy with the supplier's service or product, you may be tempted not to record the invoice in your accounting software. If you don't plan to pay the supplier for the shoddy work, why record the invoice as accounts payable, right?
Here are three reasons why you should record the invoice into the accounting system:
1. Bank Loan Covenants Require Accurate Accounts Payable
Whether you like it or not, you entered into a binding agreement with your supplier. When you leave out the invoice from your accounting software, you are understating your accounts payable balance which in turn minimizes your current and total liabilities on your financial statements.
If you have bank loans that require you to meet certain financial covenants, like any of the liquidity ratios that have accounts payable as an input, you've effectively messed up your covenant calculation. Note that when you look at these ratios, the formulas list current liabilities as an input to the calculation. Accounts payable is a component of current liabilities.
So, when the bank comes in at the end of the year and audits your books and discovers the unrecorded accounts payable, they'll re-run the covenants which may put you out of compliance.
2. Financial Analysis Depends on It
As I mentioned, not including the accounts payable understates your liabilities and messes up your current and total liabilities.
If you're doing any financial analysis on your financial statements to gain insight into your business, you've just crippled yourself by leaving out vital information.
Many businesses find looking at liquidity ratios helpful in providing insight into their business. Not having a complete accounting for account payable renders this ratio meaningless.
I'm not an attorney, but I'm pretty sure that if a supplier sends you product or provides a service that you asked for, you'll have to pay for it. Remember, they can take legal action to make you pay. Your financial statements should reflect that liability until you can a reach a settlement.
Purposely omitting the supplier invoice can be construed as lying to your lenders and investors.
So, what should you do if you have a supplier invoice that you don't want to pay because of shoddy work?
Negotiate the invoice balance to an amount that you're willing to pay and have the supplier issue a credit note and record it against the full invoice you've recorded. If you can't agree to the amount by the end of the month, record the current invoice at its full amount and continue to negotiate. At least this way your monthly financial statements are not understated.
Its important to work closely with your accounting team to keep track of invoices and what is needed to pay them in full. A dependable accounting team can prevent future hiccups down the road with accounts payable or receivable.
If you’re searching for an expert accounting team, reach out to learn how we can assist you today.