The Financial Health Check Walkthrough: What Business Owners Should Expect

A financial report can look polished while the underlying bookkeeping contains unresolved problems.

Bank and credit-card accounts may not be reconciled. Transactions may be sitting in vague or uncategorized accounts. The balance sheet may contain negative, outdated, or unexplained balances. Automated bank rules may also be processing transactions quickly without classifying them accurately.

A Financial Health Check is intended to help a business owner identify areas that appear organized and areas that may require further attention.

In the accompanying lesson, Dr. Brian Routh walks through the six areas considered during a Financial Health Check and explains what the owner receives afterward.

The Six Areas Considered

The Financial Health Check considers:

1. Reconciliation reliability — Whether bank and credit-card records appear current and supportable.
2. Account structure — Whether the chart of accounts organizes transactions into meaningful categories.
3. Financial-reporting clarity — Whether the income statement and balance sheet tell a coherent financial story.
4. Red-flag identification — Whether unusual balances, uncategorized transactions, or unexplained patterns require clarification.
5. Fund accounting, when applicable — Whether an organization’s records can distinguish resources by purpose, fund, class, project, or restriction.
6. Accounting-system configuration — Whether accounts, bank rules, opening balances, tracking categories, and reports appear configured appropriately.

A Financial Health Check is a preliminary bookkeeping-focused review. It is not an audit, tax review, legal review, fraud examination, assurance engagement, or guarantee that every transaction is correct.

Request a Complimentary Financial Health Check

For business owners who are unsure whether their bookkeeping records are current, reconciled, organized, and producing meaningful reports, TheAccountingDr offers a complimentary Financial Health Check.

Request your Financial Health Check at TheAccountingDr.com.

💼 What to Say When a Prospective Client Says, “You’re Too Expensive”

Hearing the words “You’re too expensive” can make a business owner feel defensive.

The immediate temptation may be to justify every detail of the price, reduce the fee, or offer extra work at no additional charge. But a price objection does not automatically mean your price is unreasonable.

It may mean the prospective client:

• Does not fully understand what is included
• Is comparing two services with different scopes
• Has a limited budget
• Expected a different level of investment
• Does not yet recognize the value of the outcome
• Is simply not the right fit for your business

A professional response should create clarity—not pressure.

A pricing objection should begin a conversation about value, scope, budget, and fit. It should not automatically trigger a discount.

---

🧭 Begin by Remaining Calm

When a prospective client says your service is too expensive, avoid responding emotionally.

Do not immediately say:

“I can lower the price.”

Do not become defensive by listing every credential you possess.

Do not criticize lower-priced competitors.

Instead, acknowledge the concern respectfully:

“I understand that price is an important consideration.”

That response communicates confidence without dismissing the person’s concern.

Your goal is not to argue that the prospect is wrong. Your goal is to understand what the objection actually means.

---

1️⃣ Clarify the Real Concern

“You’re too expensive” can mean several different things.

It could mean:

• “I cannot afford this right now.”
• “I received a lower quote.”
• “I do not understand why this costs so much.”
• “I expected fewer services.”
• “I do not believe I need everything included.”
• “I am uncertain whether the result will justify the investment.”

A useful follow-up question is:

“Is your concern the total investment, the scope of work, or the timing?”

You might also ask:

“May I ask what you are comparing the price to?”

These questions help you determine whether the issue is price, value, scope, timing, or fit.

That distinction matters because each concern requires a different response.

---

2️⃣ Review the Scope of Work

Two prices cannot be compared meaningfully unless the underlying services are also compared.

One provider may offer only a limited task, while another may include:

• Initial review and setup
• Ongoing communication
• Transaction review
• Reconciliations
• Corrections
• Reporting
• Follow-up support
• Professional experience
• Clearly defined processes

A prospective client may be comparing your complete service with a lower-priced option that includes substantially less.

You can respond:

“Let’s review what is included so you can determine whether the service matches what your business actually needs.”

This does not require criticizing another provider. Simply explain your own scope clearly.

---

📋 Questions to Review Together

Consider discussing:

• What problem the client wants solved
• Which services are included
• Which services are excluded
• How often the work will be completed
• What information the client will receive
• What support is available
• What responsibilities remain with the client
• What outcome the engagement is designed to provide

Clear expectations help the prospect evaluate the proposal based on more than the final number.

---

3️⃣ Explain the Value Without Overselling

Value is not merely a list of tasks.

It is the benefit the client receives from having the work completed properly.

For professional bookkeeping, value may include:

• Current financial records
• Reconciled accounts
• More dependable monthly reports
• Better organization
• Reduced confusion
• Clearer communication
• Improved visibility into business activity
• More useful information for decision-making

A professional response might be:

“My fee reflects the scope of work, the professional experience involved, and the level of service included. The objective is to provide records that are current, reconciled, supported, and useful for understanding your business.”

The goal is not to promise a particular business result. It is to explain the purpose and quality of the service being offered.

---

4️⃣ Do Not Discount Automatically

An immediate discount can create several problems.

It may suggest that:

• The original price was arbitrary
• The scope can be completed properly for less
• The client should challenge future pricing
• The value of the service is negotiable without changing the work
• The business is more concerned about winning the client than maintaining a sustainable engagement

That does not mean prices can never change.

A price may change when the scope changes.

For example, you might offer:

• A smaller initial project
• Fewer optional services
• A phased implementation
• A revised frequency
• A clearly limited engagement

The important principle is:

Reduce the scope before reducing the price for the same work.

This protects both the client and the service provider from entering an engagement that cannot be completed properly at the agreed fee.

---

5️⃣ Determine Whether the Prospect Is the Right Fit

Not every prospective client should become a client.

A strong professional relationship requires alignment among:

• The client’s needs
• The services offered
• The available budget
• Communication expectations
• Timing
• Responsibilities
• The level of support required

Sometimes the prospect truly cannot afford the service.

Sometimes the need is smaller than initially presented.

Sometimes the prospect wants a level of work that cannot reasonably be provided within the stated budget.

In those situations, it is acceptable to say:

“I understand. Based on the scope we discussed, I may not be the right fit for your current budget. I would rather be transparent than reduce the work below the level your business needs.”

That response is respectful, honest, and professional.

---

💬 A Three-Step Response You Can Use

When someone says, “You’re too expensive,” try this structure.

Step 1: Acknowledge

“I understand that price is an important consideration.”

Step 2: Clarify

“Is your concern the total investment, the scope of work, or the timing?”

Step 3: Review the Value

“Let’s review what is included and determine whether the service matches what your business actually needs.”

This approach allows the conversation to continue without immediately defending, discounting, or pressuring the prospect.

---

🧾 A Bookkeeping Example

Suppose a business owner receives two bookkeeping proposals.

Proposal A

The lower-priced proposal includes:

• Basic transaction categorization
• Limited communication
• No cleanup of prior errors
• No defined monthly reporting process

Proposal B

The higher-priced proposal includes:

• Transaction review and categorization
• Bank and credit-card reconciliations
• Review of outstanding bookkeeping issues
• Monthly financial reporting
• Ongoing communication
• A defined workflow and service schedule

The two proposals are not necessarily offering the same service.

The correct question is not simply:

“Which price is lower?”

The better questions are:

• What does each proposal include?
• What does each proposal exclude?
• Which problems will actually be addressed?
• What responsibilities remain with the business owner?
• Which service best matches the needs of the business?

Price matters, but it should be considered alongside scope and value.

---

⚠️ Responses to Avoid

“I’ll match the lower price.”

A competitor’s price may reflect a different scope, level of experience, or service model.

“You get what you pay for.”

Even when the idea may contain some truth, the statement can sound dismissive or insulting.

“No one else will do this correctly.”

Avoid unsupported claims about competitors.

“My price is nonnegotiable.”

That may be accurate, but it closes the conversation before the concern is understood.

“What can you afford?”

This can shift the discussion away from the actual work required. It is usually better to clarify the need and adjust the scope when appropriate.

---

📊 Pricing Is Also a Business Decision

Business owners must set prices that support the quality and sustainability of their services.

A price should consider factors such as:

• Time required
• Complexity
• Professional expertise
• Technology and systems
• Administrative work
• Communication
• Risk
• Capacity
• Ongoing support
• The scope of the engagement

Pricing too low can create its own problems.

The business may become overextended, the service may be rushed, and the owner may be unable to provide the level of work originally promised.

A sustainable price helps support consistent service.

---

🌱 Confidence Does Not Mean Arrogance

Confidence means being able to explain:

• What you provide
• Why it matters
• What it requires
• What it does not include
• Who is a good fit
• When you should respectfully decline an engagement

You do not need to persuade every prospect.

You need to communicate clearly enough for both parties to make an informed decision.

A respectful “not right now” is often better than an engagement built on unclear expectations and unsustainable pricing.

---

✅ Practical Business-Owner Takeaway

When a prospective client says, “You’re too expensive,” do not immediately defend your price or offer a discount.

Instead:

1. Acknowledge the concern.
2. Clarify whether the issue is price, scope, timing, or budget.
3. Review what the service includes.
4. Explain the value and intended outcome.
5. Adjust the scope when appropriate.
6. Decide whether the relationship is a reasonable fit.

A price objection is an opportunity to create clarity—not a command to reduce your value.

---

🧭 Professional Bookkeeping Support

Professional bookkeeping should provide more than transaction entry. It should support current records, reconciled accounts, meaningful financial reporting, and clearer information for business decisions.

Visit TheAccountingDr.com to learn about professional bookkeeping support.

---

👨‍🏫 About the Author

Dr. Brian Routh is an accounting professor and professional bookkeeper who helps business owners gain financial clarity through professional bookkeeping. He is the founder of TheAccountingDr, a former North Carolina Assistant State Auditor, and a Xero Certified Professional.

Clarity Comes Before Decisions. 

📊 Cash Flow Questions to Ask Monthly: A Practical Case Example

A positive bank balance does not automatically mean a business has enough cash for what comes next.

A business may have money available today while also facing payroll, vendor bills, loan payments, inventory purchases, rent, and other obligations in the coming weeks. At the same time, expected customer payments may arrive later than planned.

That is why a useful monthly cash-flow review should look beyond the current balance and ask:

What cash is expected, what payments are due, and will the remaining cash be enough for upcoming obligations?

Cash-flow planning is not about predicting every dollar perfectly. It is about identifying possible timing problems early enough to make informed decisions.

---

💵 Cash Flow Is About More Than the Bank Balance

Cash flow reflects money moving into and out of the business.

Cash may enter through:

• Customer payments
• Product sales
• Recurring service revenue
• Owner contributions
• Loan proceeds
• Refunds or reimbursements

Cash may leave through:

• Payroll
• Vendor payments
• Rent
• Insurance
• Loan payments
• Software subscriptions
• Inventory purchases
• Equipment purchases
• Other operating expenses

The current bank balance shows how much cash is available now. It does not, by itself, show what the business will collect or what it must pay next.

That distinction is important because cash-flow problems often begin before the bank balance appears alarming.

---

🧮 Monthly Cash-Flow Case Example

Suppose a business begins the month with $20,000 in cash.

During the month, it expects:

• $15,000 in customer collections
• $24,000 in scheduled payments

The simplified calculation is:

Beginning Cash + Expected Receipts − Scheduled Payments = Projected Ending Cash

Using the example:

$20,000 + $15,000 − $24,000 = $11,000

The business expects to end the month with $11,000.

At first glance, that may seem reassuring. The projected balance is still positive.

But the most important question is not simply:

“Will there be money left?”

The better question is:

“Will the remaining $11,000 be enough for what comes due next?”

If payroll, rent, loan payments, or major vendor bills are due before the next significant customer collection arrives, the business may still face cash pressure.

---

❓ Question 1: What Cash Is Expected—and When?

The first monthly question should be:

What cash does the business reasonably expect to receive, and when should it arrive?

Expected receipts may include:

• Outstanding customer invoices
• Scheduled recurring payments
• Confirmed product sales
• Contract payments
• Customer deposits
• Other known receipts

The timing matters.

A customer invoice may be due this month, but that does not guarantee the payment will arrive on time. A business should distinguish between:

✅ Payments that are highly likely
⚠️ Payments that may be delayed
❓ Sales that are only projected or hoped for

🔍 Questions to review

• Which customer invoices remain unpaid?
• Which invoices are overdue?
• Do certain customers routinely pay late?
• Are major collections expected near the end of the month?
• Are expected sales based on confirmed activity?
• Could refunds, chargebacks, or processing delays reduce available cash?

A realistic estimate is more helpful than an optimistic one.

---

❓ Question 2: What Payments Are Due—and When?

The second question is:

What payments must the business make, and on what dates will the cash leave the account?

Scheduled payments may include:

• Payroll
• Vendor bills
• Rent
• Loan payments
• Insurance
• Credit-card payments
• Software subscriptions
• Inventory purchases
• Equipment purchases
• Other recurring obligations

Listing only a monthly total may not reveal when the pressure will occur.

For example, a business might have enough cash to cover the month overall but not enough to cover several large payments due during the first week.

📅 A simple payment timeline

Week 1

• Payroll: $6,000
• Rent: $2,500
• Software subscriptions: $500

Week 2

• Vendor payments: $4,000
• Loan payment: $1,200

Week 3

• Payroll: $6,000
• Inventory purchase: $2,000

Week 4

• Credit-card payment: $1,800

Organizing payments by date helps the owner see when available cash may become tight.

---

❓ Question 3: Will Ending Cash Cover Upcoming Obligations?

A projected ending balance should not be viewed as completely available cash.

Some or all of that money may already be needed for obligations due shortly after the month ends.

Suppose the business in our example expects to finish with $11,000, but the first week of the following month includes:

• Payroll of $7,000
• Rent of $2,500
• Loan payments of $1,500
• Vendor bills of $3,000

Those obligations total $14,000.

If the next major customer payment will not arrive until later in the month, the business could experience a shortage even though the previous month ended with a positive bank balance.

Positive ending cash does not always mean sufficient ending cash.

---

📌 Question 4: Which Cash-Flow Assumptions Are Uncertain?

Cash-flow projections are built on assumptions.

The business may assume:

• Customers will pay on time
• Sales will meet expectations
• Vendor costs will remain stable
• Equipment will continue operating
• No large refund will be required
• No unexpected repair will occur

Some assumptions are more reliable than others.

A useful monthly review identifies which receipts or payments could change.

🟢 Expected scenario

Uses the most likely customer collections and scheduled payments.

🟡 Cautious scenario

Assumes some collections arrive later or certain expenses are higher.

🔴 Pressure scenario

Assumes a major customer payment is delayed while essential obligations remain due.

The purpose is not to create a perfect prediction. It is to understand how vulnerable the business may be if circumstances change.

---

🧾 Question 5: Are Accounts Receivable Becoming Cash?

Revenue and cash are not the same.

A business may report strong revenue while still waiting for customers to pay.

The monthly review should consider:

• Total accounts receivable
• Overdue customer invoices
• Large unpaid balances
• Disputed invoices
• Average collection timing
• Customers who consistently pay late

If accounts receivable continues to increase while available cash declines, the problem may not be a lack of sales. It may be slow collections.

Revenue supports reported performance. Customer collections provide cash.

Both are important, but they do not occur at the same time in every business.

---

🧾 Question 6: Are All Upcoming Bills Recorded?

A cash-flow projection may appear stronger than it really is when vendor bills have not been entered.

Review accounts payable for:

• Bills due during the month
• Overdue bills
• Large upcoming obligations
• Duplicate invoices
• Disputed charges
• Vendor credits
• Payments that have already been scheduled
• Bills received but not yet entered

Current accounts-payable records help the owner understand what the business has already committed to pay.

A bank balance alone cannot provide that information.

---

📈 Question 7: Why Did Cash Change From Last Month?

A monthly cash-flow review should also compare the current period with prior periods.

Ask:

• Did customer collections increase or decrease?
• Were customers slower to pay?
• Did vendor payments increase?
• Did payroll change?
• Were there unusual purchases?
• Did inventory spending increase?
• Did loan payments or debt obligations change?
• Did the owner contribute additional cash?
• Did the business borrow money?
• Did cash decline even though reported profit increased?

The goal is not merely to calculate the ending balance.

The goal is to understand why cash changed.

---

⚠️ Common Cash-Flow Review Mistakes

Looking only at today’s bank balance

The current balance does not include future receipts or upcoming obligations.

Assuming all customer invoices will be paid on time

Invoice due dates and actual collection dates may differ.

Forgetting irregular expenses

Annual subscriptions, insurance payments, repairs, and equipment purchases can create unexpected pressure.

Treating expected receipts as guaranteed

Projected sales and unpaid invoices may not produce cash when expected.

Ignoring the first weeks of the next month

The projected month-end balance must be considered alongside early-month obligations.

Using incomplete or unreconciled records

Missing bills, duplicate transactions, incorrect classifications, and unreconciled accounts can weaken the projection.

---

💻 How Bookkeeping Supports Cash-Flow Clarity

Bookkeeping does not guarantee that customers will pay or that unexpected expenses will not occur.

It does provide the organized information needed to ask better questions.

Current and reconciled records can help identify:

• Available cash
• Outstanding customer invoices
• Unpaid vendor bills
• Recurring expenses
• Debt obligations
• Historical payment patterns
• Unusual transactions
• Differences between profit and cash

Cloud bookkeeping software such as Xero can help organize bank activity, invoices, bills, reconciliations, and financial reports.

However, the quality of the cash-flow review still depends on the quality of the bookkeeping behind it.

Good cash-flow questions require dependable financial information.

---

🪜 A Simple Monthly Cash-Flow Review Process

1️⃣ Confirm beginning cash

Start with reconciled bank and cash-account balances.

2️⃣ List expected receipts

Record both the amount and realistic receipt date.

3️⃣ List scheduled payments

Include payroll, bills, debt payments, subscriptions, and planned purchases.

4️⃣ Calculate projected ending cash

Beginning Cash + Expected Receipts − Scheduled Payments

5️⃣ Review uncertainty

Identify receipts that may arrive late and payments that could increase.

6️⃣ Look beyond the current month

Compare projected ending cash with obligations due early in the next month.

7️⃣ Update the projection

Revise it as customer payments arrive, new bills are received, or circumstances change.

A simple projection that is reviewed regularly is often more useful than a complicated forecast that is quickly outdated.

---

✅ Practical Business-Owner Takeaway

A useful monthly cash-flow review should answer more than:

“How much cash do we have today?”

It should also answer:

• What cash is expected?
• When should it arrive?
• What payments are due?
• When will they be paid?
• Which assumptions are uncertain?
• Will projected ending cash cover what comes next?

Cash-flow planning requires attention to amounts, timing, and upcoming obligations.

A positive bank balance is only one part of the financial story.

---

🧭 Professional Bookkeeping Support

Current, reconciled, and well-supported bookkeeping can provide clearer information for reviewing cash activity, accounts receivable, accounts payable, and monthly financial reports.

Visit TheAccountingDr.com to learn about professional bookkeeping support.

---

👨‍🏫 About the Author

Dr. Brian Routh is an accounting professor and professional bookkeeper who helps business owners gain financial clarity through professional bookkeeping. He is the founder of TheAccountingDr, a former North Carolina Assistant State Auditor, and a Xero Certified Professional.

Clarity Comes Before Decisions.

📘 Accounts Payable: Common Mistakes Students Make—and What They Mean for Your Business

Accounts payable may seem straightforward: a business receives a bill, records what it owes, and pays the vendor later.

But several common mistakes can cause expenses, liabilities, and cash balances to be reported incorrectly.

These errors are common in accounting classrooms because accounts payable requires students to separate three different events:

1. Receiving the goods or services
2. Recording the obligation
3. Paying the vendor

Those same distinctions matter in real businesses.

Accounts payable should represent valid, unpaid obligations—nothing more and nothing less.

🧾 What Is Accounts Payable?

Accounts payable represents amounts a business currently owes vendors or suppliers for goods or services already received.

For example, a business may receive:

• Inventory
• Office supplies
• Professional services
• Utilities
• Repairs
• Equipment
• Advertising services

If the business does not pay immediately, it records a liability.

A simplified transaction may look like this:

Debit the appropriate asset or expense account
Credit Accounts Payable

When the business later pays the vendor:

Debit Accounts Payable
Credit Cash

The payment reduces the liability. It does not normally create the original expense a second time.

---

⚠️ Mistake 1: Waiting Until Payment to Record the Bill

One of the most common mistakes is waiting until cash leaves the bank before recording the purchase or expense.

Suppose a business receives a $1,500 consulting invoice in June but pays it in July.

If the business uses accrual accounting, the June records may need to show:

• Consulting expense of $1,500
• Accounts payable of $1,500

When the bill is paid in July:

• Cash decreases by $1,500
• Accounts payable decreases by $1,500

The expense belongs to June because that is when the service was received.

📊 Why This Matters

Waiting until July to record the transaction may:

• Understate June expenses
• Overstate June profit
• Understate June liabilities
• Overstate July expenses
• Make monthly comparisons less useful

The bank account only shows when cash moved. Accounts payable helps show obligations that already existed before payment.

---

⚠️ Mistake 2: Recording the Vendor Payment as a New Expense

Another common error occurs when a bill was entered correctly, but the later payment is recorded as another expense.

Suppose a $900 repair bill was already recorded:

Repair Expense: $900
Accounts Payable: $900

When the business pays the bill, the correct effect is:

Accounts Payable decreases by $900
Cash decreases by $900

If the payment is categorized as another repair expense, the books may show $1,800 of repair expense even though the actual cost was only $900.

🔁 Why This Happens

This mistake often occurs when:

• A bank-feed transaction is categorized instead of matched
• The original bill is forgotten
• The payment is entered manually a second time
• The bookkeeping system is not reviewed before reconciliation

✅ The Key Lesson

The bill records the expense or asset. The payment settles the liability.

Those are two different accounting events.

---

⚠️ Mistake 3: Leaving Paid Bills Open

Accounts payable should not include bills that have already been paid.

A bill may remain open when:

• The payment was posted directly to an expense account
• The payment was entered against the wrong vendor
• The payment was not matched to the original bill
• A duplicate bill exists
• A credit or refund was not applied correctly

📉 Why This Matters

Leaving paid bills open may:

• Overstate accounts payable
• Make the business appear to owe more than it does
• Cause duplicate payments
• Distort cash-planning decisions
• Create confusion when reviewing vendor balances

An accounts-payable report should be reviewed regularly to confirm that open bills are still valid.

---

⚠️ Mistake 4: Leaving Duplicate Bills in the System

Duplicate vendor bills can occur when:

• The same invoice is entered twice
• A bill is imported and then entered manually
• A revised invoice is entered without removing the original
• Two users enter the same document
• A recurring bill creates an unexpected duplicate

If both bills remain open, accounts payable and expenses may be overstated.

If both are paid, the business may pay the vendor twice.

🔍 What to Review

Before approving payment, compare:

• Vendor name
• Invoice number
• Invoice date
• Amount
• Purchase order
• Supporting documentation
• Payment history

A strong duplicate-review process protects both the financial statements and the business’s cash.

---

⚠️ Mistake 5: Recording a Bill Under the Wrong Vendor

A transaction may have the correct amount and still be recorded incorrectly.

For example, a bill from one vendor may accidentally be entered under another vendor with a similar name.

This can cause:

• Incorrect vendor balances
• Confusing payment histories
• Duplicate-payment risk
• Difficulty reconciling vendor statements
• Problems locating supporting documents

Accurate vendor records are an important part of reliable accounts payable.

---

⚠️ Mistake 6: Using the Wrong Account

The other side of an accounts-payable entry must also be classified correctly.

A vendor bill could relate to:

• Inventory
• Repairs
• Office supplies
• Advertising
• Equipment
• Prepaid expenses
• Professional services
• Loan-related costs

Posting every vendor bill to a general expense account may produce misleading reports.

For example, purchasing equipment is not the same as purchasing office supplies. Buying inventory is not the same as recording Cost of Goods Sold.

The nature of the purchase determines the appropriate classification.

---

⚠️ Mistake 7: Ignoring Vendor Credits and Refunds

A vendor may issue a credit because of:

• Returned merchandise
• Damaged goods
• Pricing corrections
• Duplicate charges
• Service adjustments
• Overpayments

If the credit is not recorded and applied, accounts payable may remain too high.

The business may also pay more than it actually owes.

Vendor credits should be entered, supported, and applied to the appropriate bill or vendor balance.

---

⚠️ Mistake 8: Recording Disputed Bills as Valid Obligations Without Review

Not every invoice received is automatically correct.

A business may dispute:

• The quantity billed
• The price
• The service performed
• The delivery
• The contract terms
• A duplicate charge
• An unauthorized purchase

The bill should not simply remain unresolved indefinitely.

The business should document the dispute, communicate with the vendor, and determine the appropriate accounting treatment.

Accounts payable should reflect obligations the business reasonably expects to pay.

---

⚠️ Mistake 9: Failing to Review the Accounts-Payable Aging Report

The accounts-payable aging report organizes unpaid bills by how long they have been outstanding.

It may include categories such as:

• Current
• 1–30 days overdue
• 31–60 days overdue
• 61–90 days overdue
• More than 90 days overdue

This report can help identify:

• Bills approaching their due dates
• Old unpaid obligations
• Duplicate or invalid bills
• Vendor disputes
• Payments that were not applied correctly
• Cash-flow pressure

An aging report should not be treated as merely a list of bills. It is a management tool.

---

🏦 A Step-by-Step Example

Suppose a business receives a $2,000 inventory shipment on August 5 and agrees to pay the supplier in 30 days.

Step 1: Record the inventory purchase

The business records:

Inventory: +$2,000
Accounts Payable: +$2,000

The inventory is now an asset, and the business owes the supplier.

Step 2: Pay the vendor

On September 4, the business pays the $2,000 invoice.

The business records:

Accounts Payable: −$2,000
Cash: −$2,000

The payment settles the liability.

It does not create another inventory purchase or another expense.

Step 3: Review the vendor account

After payment, the original bill should no longer appear as open.

If it remains on the aging report, the payment may have been recorded incorrectly or not applied to the bill.

---

💻 How Bookkeeping Software Can Help

Cloud accounting software such as Xero can help organize:

• Vendor bills
• Due dates
• Accounts-payable aging
• Payments
• Credits
• Supporting documents
• Bank-feed matching
• Reconciliations
• Vendor histories

However, software does not eliminate the need for review.

A bill can be entered into the system and still be:

• Duplicated
• Misclassified
• Assigned to the wrong vendor
• Paid incorrectly
• Left open after payment
• Missing documentation

Good software improves the workflow. Accurate bookkeeping makes the information reliable.

---

📊 What Accounts Payable Tells a Business Owner

Accurate accounts payable records help answer questions such as:

• How much does the business currently owe?
• Which vendors need to be paid soon?
• Are any bills overdue?
• Are there duplicate or disputed invoices?
• How much cash will be needed in the coming weeks?
• Are expenses and liabilities recorded in the correct periods?
• Have vendor payments been applied properly?

Accounts payable provides information that a bank balance alone cannot show.

A business may have cash in the bank while also having significant unpaid obligations.

---

✅ Practical Business-Owner Takeaway

Accounts payable should provide a reliable picture of valid, unpaid obligations.

Missing bills can understate liabilities. Duplicate or settled bills can overstate expenses or amounts owed.

A strong accounts-payable process should include:

✅ Timely bill entry
✅ Correct classification
✅ Supporting documentation
✅ Duplicate review
✅ Proper payment matching
✅ Vendor-credit review
✅ Regular aging-report review
✅ Reconciliation

These steps help produce clearer reports and reduce the risk of missed or duplicate payments.

---

🧭 Professional Bookkeeping Support

Accurate accounts payable depends on properly recorded vendor bills, payments, credits, reconciliations, and supporting documentation.

Visit TheAccountingDr.com to learn about professional bookkeeping support.

---

👨‍🏫 About the Author

Dr. Brian Routh is an accounting professor and professional bookkeeper who helps business owners gain financial clarity through professional bookkeeping. He is the founder of TheAccountingDr, a former North Carolina Assistant State Auditor, and a Xero Certified Professional.

Clarity Comes Before Decisions.

📘 Accounts Payable, Inventory, and Cost of Goods Sold: A Step-by-Step Example

A business may: 

1) buy inventory today, 

2) pay the vendor later, and 

3) sell that inventory sometime after that.

Those three events do not all create an expense at the same time.

That distinction is important because inventory, accounts payable, cash, revenue, and cost of goods sold each tell a different part of the financial story.

A simple way to understand the process is to follow the inventory from purchase to payment to sale.

🛒 Step 1: The Business Buys Inventory on Account

Suppose a business purchases $1,200 of inventory from a supplier and agrees to pay the bill next month.

At the time of purchase, the business receives inventory but has not yet paid cash.

The accounting records would reflect:

• Inventory increases by $1,200.
• Accounts payable increases by $1,200.

The business now owns more inventory, but it also owes the supplier.

The simplified entry

Debit Inventory: $1,200
          Credit Accounts Payable: $1,200

At this point, the $1,200 is generally recorded as an asset—not as an expense.

Why?

Because the inventory has not yet been sold. The business still expects that inventory to help generate future revenue.

📦 Inventory Is an Asset Until It Is Sold

One of the most common mistakes is treating inventory as an immediate expense when it is purchased.

For a business using a perpetual inventory system, inventory generally remains on the balance sheet as an asset until the related goods are sold.

That means buying inventory does not automatically create cost of goods sold.

The purchase changes the composition of the business’s financial position:

• The business has more inventory.
• The business has a larger obligation to the supplier.
• No cash has moved yet.
• No inventory expense has been recognized yet.

This is why the balance sheet and income statement must be understood together.

💳 Step 2: The Business Pays the Vendor Later

Suppose the business pays the $1,200 supplier bill the following month.

The payment reduces both cash and accounts payable.

The accounting records would reflect:

• Cash decreases by $1,200.
• Accounts payable decreases by $1,200.

The simplified entry

Debit Accounts Payable: $1,200
          Credit Cash: $1,200

The payment settles the liability.

It does not create a new inventory purchase, and it does not create a second expense.

The inventory is still recorded as an asset until it is sold.

⚠️ Payment Is Not the Same as Expense Recognition

Another common mistake is assuming that an expense occurs whenever cash is paid.

In this example, the cash payment relates to an obligation that was already recorded when the inventory was purchased.

When the supplier is paid:

• The liability is removed.
• Cash is reduced.
• Inventory remains unchanged.
• Cost of goods sold is not recorded merely because payment occurred.

This is one reason bank activity alone does not provide a complete picture of business performance.

The bank account shows when cash moved. The accounting records should also show why it moved and what obligation or asset was involved.

🧾 Step 3: The Business Sells Part of the Inventory

Now suppose the business sells inventory to a customer for $1,000.

Assume the portion of inventory sold originally cost the business $600.

This sale creates two separate accounting effects.

Effect 1: Record the sale

If the customer pays immediately:

Debit Cash: $1,000
          Credit Sales Revenue: $1,000

The business records $1,000 of revenue.

Effect 2: Record the cost of the inventory sold

The inventory that was sold is no longer an asset owned by the business.

Its $600 cost is moved from inventory to Cost of Goods Sold, commonly abbreviated CGS or COGS.

Debit CGS: $600
          Credit Inventory: $600

This second entry records the actual expense associated with the products sold.

📊 Why Cost of Goods Sold Is Recorded at the Time of Sale

Cost of goods sold represents the cost of the inventory that generated the related sales revenue.

Before the sale, the inventory is an asset.

After the sale, that inventory has been used to generate revenue, so its cost becomes an expense.

This is an application of the matching concept: the cost of the inventory is recognized in the same period as the related sales revenue.

In this example:

• Sales revenue is $1,000.
• Cost of goods sold is $600.
• Gross profit is $400.

The simplified calculation is:

Sales Revenue − Cost of Goods Sold = Gross Profit
$1,000 − $600 = $400

Gross profit is not the same as net profit. Other operating expenses still need to be considered.

🧮 The Full Step-by-Step Flow

Here is the complete sequence.

1️⃣ Buy inventory on account

• Inventory increases by $1,200.
• Accounts payable increases by $1,200.
• No cash is paid.
• No cost of goods sold is recorded.

2️⃣ Pay the supplier

• Cash decreases by $1,200.
• Accounts payable decreases by $1,200.
• Inventory remains on the balance sheet.
• No new expense is created by the payment.

3️⃣ Sell inventory that cost $600 for $1,000

• Cash or accounts receivable increases by $1,000.
• Sales revenue increases by $1,000.
• Cost of goods sold increases by $600.
• Inventory decreases by $600.

4️⃣ Determine what remains

The business originally purchased $1,200 of inventory.

After selling inventory that cost $600:

Remaining Inventory = $1,200 − $600 = $600

The balance sheet would still show $600 of inventory, assuming no other purchases, sales, losses, or adjustments.

📈 What Appears on the Financial Statements?

These transactions affect both the balance sheet and income statement.

Balance sheet

The balance sheet may show:

• Remaining inventory of $600
• Reduced cash after paying the supplier
• No remaining accounts payable from this purchase, assuming the entire bill was paid

Income statement

The income statement may show:

• Sales revenue of $1,000
• Cost of goods sold of $600
• Gross profit of $400

The statements are connected.

The balance sheet shows the inventory still owned. The income statement shows the cost of the inventory already sold.

🔍 Why This Matters for Business Owners

This process helps explain several important business questions:

• How much inventory does the business still own?
• How much does the business owe suppliers?
• Has inventory been paid for?
• Which inventory costs belong on the balance sheet?
• Which inventory costs belong on the income statement?
• How much gross profit is being earned on product sales?
• Are purchases being recorded twice?
• Are supplier payments being incorrectly recorded as expenses?

Without accurate inventory and accounts-payable records, gross profit and financial position may be misstated.

⚠️ Common Bookkeeping Mistakes

Recording inventory purchases directly as cost of goods sold

This can overstate expenses before the inventory is sold and understate assets.

Recording the vendor payment as another expense

This duplicates the effect of the original purchase and may overstate expenses.

Failing to reduce inventory when products are sold

This can overstate inventory and understate cost of goods sold.

Recording revenue without recording cost of goods sold

This may overstate gross profit.

Using the selling price as the inventory cost

Cost of goods sold should reflect the cost assigned to the inventory sold, not the amount charged to the customer.

Failing to reconcile inventory records

Inventory quantities, product records, purchases, sales, and the general ledger should be reviewed for consistency.

💻 How Bookkeeping Software Can Help

Cloud accounting software such as Xero can help organize:

• Supplier bills
• Accounts payable
• Payments
• Inventory purchases
• Sales
• Product activity
• Financial reports
• Account reconciliations

However, software does not remove the need for careful setup and review.

The bookkeeping system must distinguish among:

• Inventory purchases
• Operating expenses
• Supplier payments
• Sales revenue
• Cost of goods sold
• Remaining inventory

If those transactions are classified incorrectly, the reports may look complete while still being misleading.

🧭 A Note About Inventory Methods

The exact calculation of inventory and cost of goods sold can depend on the inventory method and the way the business tracks product activity.

Businesses may use methods such as:

• Specific identification
• First-in, first-out
• Weighted average

This article uses a simplified example to explain the basic accounting flow. The appropriate method and system should match the nature of the business and its records.

✅ Practical Business-Owner Takeaway

Buying inventory, paying for inventory, and expensing inventory are three different events.

Inventory is generally recorded as an asset when purchased, accounts payable is reduced when the vendor is paid, and cost of goods sold is recognized when the inventory is sold.

Understanding that sequence helps business owners interpret inventory balances, supplier obligations, gross profit, and cash activity more accurately.

🧭 Professional Bookkeeping Support

Accurate product-sales bookkeeping requires properly recorded inventory purchases, supplier bills, payments, sales, cost of goods sold, reconciliations, and supporting documentation.

Visit TheAccountingDr.com to learn about professional bookkeeping support, including inventory and product-sales bookkeeping.

👨‍🏫 About the Author

Dr. Brian Routh is an accounting professor and professional bookkeeper who helps business owners gain financial clarity through professional bookkeeping. He is the founder of TheAccountingDr, a former North Carolina Assistant State Auditor, and a Xero Certified Professional.

Remember... Clarity Comes Before Decisions.