Definition:
Account Payable is the type of current liability that probable to an outflow of the company’s assets. The economic outflow will result if the entity settlement of this liability.
In the normal business’ activities, the account payable occurred when the entity receives goods or services from its suppliers while the payment is pending until agree time.
Account payable is recording as a current liability in the entity balance sheet. This is because the period that an entity will settle to the supplier is less than 12 months.
How to records Account Payable?
Account Payable is different from Accrual. Accrual is the liability that the entity owes to the supplier but those supplier still not bill to entity.
But AP is the liability that the entity was billed from suppliers. For example, buying raw material on credit is the AP because you know exactly the amount you own to the suppliers.
But, billing of monthly electricity’s expenses would normally receive at the beginning of the following month and you don’t really know how much it would be.
Even you know, you still could not record it as the payable because the official document to records it still not receiving yet. The only thing you could do for electricity expenses would be accrual based on your best estimate.
The following is the formula of how to records Account Payable in the Financial Statements.
At the time AP meet with its requirement, then it is recorded in the financial statement like this:
Debit Purchase (or Specific Items in P&L) XXX
Credit Account Payable (Supplier Name) XXX
Note: the purchase here is part of the inventories movement and it going to become the cost of goods sold in the income statement.
If the company purchase such material that uses in the months like stationary, we could record the purchase here as the expenses directly.
Now let we move to the example so that we could understand it clearly,
Example:
ABC company purchased stationery for use in the company. Based on accounting policies, such stationery will be treated as expenses for the month of purchase.
During January 2016, ABC purchases USD 10,000 from a local supplier in credit and expected to be paid in May of the same year.
In this example, we know the exact amount of liability that ABC owns to the local supplier and this amount is expected to be paid in the next May.
This is the short term liability and we need to records as the Account Payable in January 2016.
Here is the transaction,
Debit Stationary Expenses USD 10,000 in income statement
Credit Local supplier in USD 10,000 Balance Sheet
We hope the above explanation could help you understand the concept of Account Payable and if you have any question about it. Please commend below, we will try to help you.
