In our re-vamped weekly segment, Common Cents Wednesdays, we help explain simple-to -complex financial terms. This week, we’re covering ‘accounts payable’, ‘collateral’ & ‘balance sheets’. It might sound like a super dry read, but since you’re in the “Cafe” grab a Timmies doughnut to sweeten the knowledge.
We won’t tell.
This one can sure be sneaky. It can be used to explain an individual financial circumstance or a business one, and individuals use it every day, sometimes without even realizing it. Essentially, accounts payable are any outstanding loans, credit or services that a person has not been paid for yet.
Examples of accounts payable services are your hydro, television, internet and phone accounts; services provided before they’re paid for. Not paying your hydro bill on time or your cell bill on time won’t directly affect your credit score, that is, unless you’re sent to collections for an unpaid amount.
In the business world, accounts payable refers to the money that a business owes to it’s suppliers and shows up on their balance sheet as a liability. Subsequently, there are two different types of payable’s in business accounting. Trade payable’s are physical goods received and are counted in inventory. Expense payable’s are payable’s for the purchase of goods or services that are expended. An example of an expense payable would would be a business obtaining credit to launch an advertising campaign.
Balance sheets are another type of accounting document, either for the individual or for a business. Balance sheets summary of the financial balances of a business or person. They include all of the assets & all the liabilities. Business balance sheets also include information about shareholder equity, which represents the remaining interest in assets of a company spread among individual shareholders.
Here’s an example of a balance sheet for a small Canadian business:
Greg’s Gourmet Cupcakes*
Liabilities and Shareholder Equity
|Cash – $10, 000||Accounts Payable – $30,000|
|Accounts Receivable – $8,000||Capital Stock-$12,000|
|Equipment and Tools – $25,000||Retained Earnings- $1,000|
|Total- $43,000||Total -$43,000|
What does your personal balance sheet look like? Have you recorded all of your current assets (owned vehicle, your home, savings, stocks, bonds, etc). How about your liabilities, such as long-term debt (we’re looking at you, student loans and mortgages), or short-term debt like credit cards or car payments? Regardless of how large or small each column is for your personal finances, balance sheets are useful tool for tracking what you own and what you owe.
Remember that time when you were 9 years old, and your friend asked for a few bucks to buy some candy at the store when you were out? You probably handed it over faithfully, your hard-earned allowance being given away to share the joys of sugar. Did you get paid back? If not, how willing were you to lend again without some kind of assurance?
When people borrow money from one another, there is usually a need for security on the part of the lender. The lender wants to know, without a doubt, that they will be repaid in full. Collateral is a borrower’s pledge of something of value to put secure repayment. It ultimately serves as protection for the lender in the event that the borrower can’t pay what they borrowed back. For example, say you needed to borrow $500 from your cousin, but your cousin is struggling for cash, too, and needs something to protect his backside in the event you can’t pay him back. You offer him something of value, say a computer, a stock, a watch – whatever, as collateral. When you pay him back, he returns the item. If you can’t pay him back, he cashes in.
In banking, collateral usually refers to secured lending. This means that the bank can take action to secure collateral in the event you default in the form of cash, property or surety.
When it comes to collateral, we recommend never putting anything down that you can’t live without. Ensure your payments are going out on time. Ultimately, the more you monitor your finances, and the more you educate yourself, the better decisions you will make.