If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content

Doing the example with accounts payable growing

Introduction to Accounts Payable. Created by Sal Khan.

Want to join the conversation?

  • leaf green style avatar for user Jack(All Trades)
    Wouldn't an increase in shareholder's equity bring in cash? Is there a specific reason that is not taken into account in this example?
    (7 votes)
    Default Khan Academy avatar avatar for user
    • leaf green style avatar for user Ryan
      Equity is just the difference between assets and liabilities. E = A - L. If equity increases it just means assets increased more than liabilities, or that liabilities fell more than assets. It doesn't tell us anything about a company's cash situation. There are plenty of ways to increase equity without receiving any cash.
      (28 votes)
  • blobby green style avatar for user sam sharma
    When calculating cash flow from operating activities, do we include the tax shields provided by depreciation and interest?
    (3 votes)
    Default Khan Academy avatar avatar for user
    • purple pi purple style avatar for user Patrick Sanford
      When you create the income statement, depreciation is an expense. It lowers your gross revenue to profit. But no actual cash has been paid for that depreciation. It's an idea that a large purchase cost's can be spread out over the life of that purchase.

      Because the cash did not disperse because of depreciation, you add back the depreciation to the income.

      Example: Gross revenue: $1,000. Expenses: $300. Deprecation: $100. When you do the income statement, you take your gross revenue minus your expenses and deprecation for your profit. $1,000 - $300 - $100 = $600. This $600 is net income. When you go to your cash flow statement, you start with you beginning cash, say $500, add net income, and add back depreciation. So $500 + $600 + $100 = $1,200 ending cash. Now let's think about it. You started with $500, had gross revenue of $1,000, and spent cash of $300. That's $500 + $1,000 - $300 = $1,200. The depreciation was not a cash expense, so it's not in that second equation.
      (7 votes)
  • blobby green style avatar for user mallighaasafoetida
    can we transfer the excess of cash to reserve in an monthly cash flow
    (3 votes)
    Default Khan Academy avatar avatar for user
    • leaf yellow style avatar for user Erik Carlson
      Yes. The Cash Flow Statement must show ALL cash activities during the period which is shown in three main categories, Cash from (used for) operating activities, investing activities, and financing activities. To keep things simple, Sal has been demonstrating only operating cash activities. Generally, cash transferred to a reserve during the period would be categorized on the Cash Flow Statement as an Investing Activity.
      (7 votes)
  • blobby green style avatar for user yilinhuo
    I still dont understand how accounts payable increase is a source of cash/
    (3 votes)
    Default Khan Academy avatar avatar for user
    • piceratops ultimate style avatar for user SideralVoid
      Accounts payable are not really a source of cash. Instead, they allow a business to postpone the payment of a part of the cost of goods sold. In the case of the example in this video, the business was able to pay 100$ in month 2 for the goods and have an account payable of 100$ (essentially a debt) instead of paying 200$. So, for month 2, the business saved 100$, but it will still need to pay that 100$ in the next month. In short, accounts payable are a way to split or postpone an expense, not a source of cash.
      (4 votes)
  • aqualine seed style avatar for user snowybluey
    then what is the difference between deferred revenue and accounts payable? don't you owe some one money in both cases?
    (1 vote)
    Default Khan Academy avatar avatar for user
    • spunky sam blue style avatar for user Guy
      Accounts payable is money you owe to someone else. For example, if you buy something with a credit card, what you owe is your accounts payable. Deferred revenue is simply revenue that you are deferring until you complete the job. For example. if you promise to mow someone's lawn , and they pay you $100 before you do it, then you are deferring that revenue until you complete that job.
      (5 votes)
  • piceratops sapling style avatar for user Dan
    So starting at around , do some businesses just carry debt indefinitely? In other words, do they find no incentive to pay off their Accounts Payable to $0, constantly owing one business or another? If so, how is that sustainable??
    (2 votes)
    Default Khan Academy avatar avatar for user
    • ohnoes default style avatar for user Tejas
      It is sustainable as long as people are willing to lend to them. Most businesses carry debt indefinitely, but that is more for leveraging. It is sustainable because the business itself is still making a profit which it can use to pay interest.
      (2 votes)
  • leaf green style avatar for user tigre 200
    If accounts payable is the amount you owe in the future for things you have acquired now, how is it called when you pay for something now that you will only receive in the future? How would you go about including that in the income, blalance sheet and cash flow statements?
    (2 votes)
    Default Khan Academy avatar avatar for user
  • blobby green style avatar for user Celina
    If I were to do a cash flow statement for one month instead of the whole year:What would be my beginning net income? Would it be the ytd for the year or just the net income for the prior month? Would all my adjustments to get to the bottom cash be the activity just for the month?
    (2 votes)
    Default Khan Academy avatar avatar for user
    • purple pi purple style avatar for user Patrick Sanford
      Yes. You do a cash flow statement over a period of time. Starting cash at beginning of month to ending cash at end of month, or starting cash at beginning of year to ending cash at end of year. This will pair with the income statement also done for that period, or the time from beginning to end.
      (1 vote)
  • blobby green style avatar for user t.k.sandrock
    Do companies have statements for all their assets (like stocks and equipment plus cash) and liabilities (like debt and lost revenue) ? And if they do what are they called?
    (1 vote)
    Default Khan Academy avatar avatar for user
  • blobby green style avatar for user Herbert Williams
    What is an example of a change in a liability that would show up on the balance sheet and the statement of cash flow?
    (1 vote)
    Default Khan Academy avatar avatar for user

Video transcript

In the last series of examples, we go into month two with $100 in cash. And the way we set up the example, we spend $200 in month two. And what we've been doing so far is we're saying, oh, that gets us to a cash balance of negative $100 at the end of month two. And that's a little unrealistic. I kept it simple here, and I allowed us to have a negative cash balance just for simplicity. But usually you will not see a negative cash balance. The fact that you have a negative cash balance and you're allowed to operate, it essentially means that someone is lending you money. So to make this example a little bit more realistic, let's imagine a situation. So in month two, you only have $100. The person that you're catering for-- that you're buying these $200 of supply for-- they're not going to pay you until next month. So you tell the people that you need to buy stuff from, look, I only have $100. I have this customer. I'm doing the catering for them this month. Can I pay $100 to you this month, and then maybe pay another $100 to you next month? And let's say that they agree to that. So in month two, on a cash basis, instead of spending $200, you're actually spending-- I'll just write over it-- you're actually spending $100. And then in month three, you'll also spend $100. Now, this will change your cash accounting numbers. This will now be negative 100 and this would now be $500. But the more important thing is, I want to show you how this could be accounted for in accounts payables. The fact that you essentially told your vendors, even though you gave me $200 worth of stuff, I'm only going to give you $100 now, and I'm going to give you $100 later-- that means that you've increased your accounts payable by $100. You've increased this liability that you owe things to other people. So let me add accounts payables over here. So I will add it-- I'll add it in a row-- I'll do it on both of these diagrams-- So I'll just call it accounts-- I'll just do A period, so I don't have to write the whole thing-- accounts payable. And going into the period, you didn't have any accounts payable. And then now that you're essentially borrowing $100 from your vendors-- you're allowing to push back when you pay them-- You now have an accounts payable of $100. And I'm not going to work through it on all of this stuff over here. But let's see how that would have affected the income statement and the balance sheets. So over here, all of a sudden, you had another liability-- accounts payable is a liability-- You have an accounts payable liability of $100. So at this point, we had no accounts payable liability. And then after the end of the month, we have an accounts payable liability of $100. We owe $100 to our vendors, and our cash is now at 0. So notice it still does not change our equity. We essentially added $100 to cash, and then we added a $100 liability. They cancel out. If you take now this part right here, all of the assets are 400. 400 400 minus 100 in liabilities still gets you to 300 in equity. But now the reconciliation is to go from $100 in cash to 0 cash. We're not allowing ourselves to go negative. And the reason why we can do that is we actually have a source of cash. So let me erase that, and then let's add a line right down-- Let me see if I can add a line right over here. So we could say accounts payable increase, and now this is a source of cash. And it might not be obvious. We're increasing a liability. But it's a source of cash because we don't have to use our own cash. By increasing the accounts payable, it's allowing us to not use all of our cash. So we have an accounts payable increase of 100. So this is a source of cash. So now the cash from operations-- 200 net income, minus 400 plus 100. This whole thing is now minus 100 cash from operations. So you start with $100, you use 100. Our ending cash is now 0, and it all works out.