Definition:
Account payable is the type of current liability where the probability of an outflow of the company’s assets is expected to have happened. The economic outflow will happen when the entity settlement the liability.
In normal business’ activities, the account payable occurs when the entity receives goods or services from its suppliers while the payment is pending until the company release the payment to its supplier.
Account payable is recording as a current liability in the entity balance sheet. This is because the period that an entity will settle with the supplier is less than 12 months. The journal entries to recognize account payable are different from recording the other liabilities in the financial statements.
In this article, we will discuss how to record the journal entry of accounts payable in the entity’s financial statements and the entries to derecognize the payable.
How to Journal Entry Account Payable?
Account payable is different from accrued expenses. Accrual is the entity’s liability to the supplier, but that supplier has not billed to the entity.
But account payable is the liability that the entity was billed from suppliers on the exact amount that the entity purchased service or products from them. For example, buying raw material on credit is the account payable because you know exactly the amount you owe to the suppliers.
For example, billing of monthly electricity 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 payable because the official document to records is still not receiving yet. The only thing you could do for electricity expenses would be accrual based on your best estimate.
In this case, the company needs to accrue the electricity’s expenses:
Here is the journal entry:
| Description | Dr | Cr |
| Electricity’s Expenses: (Income statement) | XXX | |
| Accrual (Electricity’s expenses): (Balance sheet) | XXX |
In the following month, the company might receive an invoice from its supplier. And the amount in the invoice might be different from what the company has accrual in the beginning.
Here is the journal entry to records the account payable when the company receive the invoice from its supplier
| Description | Dr | Cr |
| Accrual (Electricity’s expenses): (Balance sheet) | XXX | |
| Supplier account: (Balance sheet) | XXX |
Why do we record only in the balance sheet this time?
Well, the thing is, the expenses are records already when the company accrual the expenses. And in this case, the accrual amount is equal to the actual expenses.
However, if the invoice is different from accrual, the difference will be affected the income statement.
How to record the journal entry when the company pays its supplier?
When the company pays its supplier, that means the company discharges its liabilities from its supplier. That means the liabilities should need to release from its balance sheet.
Here are the records of when the company pays its supplier,
| Description | Dr | Cr |
| Supplier account (Balance sheet) | XXX | |
| Cash/bank (Balance sheet) | XXX |
It depends on what is the payment methods that the company selects to pay. If the company uses cash to pay its supplier, then we need to select a cash account. If the company selects a bank, then we should select a bank account.
Now let us move to the example so that we can 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.
In January 2016, ABC purchased USD10,000 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 the next May.
This is the short-term liability, and we need to records it as the Account Payable in January 2016.
Here is the transaction:
| Description | Dr | Cr |
| Stationary Expenses (Income statement) | USD10,000 | |
| Local Supplier (Balance Sheet) | USD10,000 |
What if the company receives the invoice in May and they also pay in May?
If the company receives the invoice in May, it means that the company should accrue the expenses incurred in Jan the amount of USD10,000.
Here is the entry,
| Description | Dr | Cr |
| Stationary Expenses (Income statement) | USD10,000 | |
| Accrual Expenses (Balance sheet) | USD10,000 |
And when the company receives in May USD11,000, here is the entry:
| Description | Dr | Cr | |
| Stationary Expenses (Income statement) | USD1,000 | ||
| Accrual expenses (Balance sheet) | USD10,000 | ||
| Supplier account (Balance sheet) | USD10,000 |
As you can see, additional expenses of USD1,000 are recorded in May.
