AP Balance in the DPO Calculation


Q: Do you only include the AP balance from the AP subledger in the DPO calculation or do you include the entire payables balance on the balance sheet? The AP balance from the balance sheet includes accruals and other liabilities that are not included in the AP subledger. What number do you use for the AP balance in the DPO calculation?

A: The answer to your question can depend on the type of accruals. In many cases companies will include the accruals assuming they are for items that will be run through the AP system to process for payments, it just happens that the invoices did not get into the system in time for the month end close. The accruals are done to adhere to the "matching principal" for Generally Accepted Accounting Principles (GAAP) whereby the revenue earned during a period is matched to the expense required to generate the revenue. Possibly excluding the accruals would distort the DPO calculation by understating it.

It's also possible to separate out the DPO between the AP system balance vs. the accruals and calculate it independently.

Your question is also a good one to post in the Forums section of the site where you can get feedback directly from your peers as to how they have decided to handle accruals in their DPO calculation.

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