Introduction:
Trade creditors or payables or accounts payable are the outstanding balances to be paid to the creditors or other company parties for different services or products at purchase on credit.
Accounts payables are the credit nature class shown under the current liabilities section of the statement of financial position. Accounts payables cannot be written off just because the deadline for payment of liability has passed. It should be written off or derecognized from the financial statement only if the company has no more responsibility to pay off the liabilities.
In this article, we will discuss how to account for writing off accounts payable from the company’s financial statements.
There are certain criteria provided by the accounting standard IFRS-9 of the international financial reporting standards. These guidelines are individually explained below:
Guideline by IFRS-9:
The liability of the entity does not finish just because the deadline for the payment has passed.
IFRS-9 states that financial liabilities should only be de-recognized or written off by the company when the obligation to pay for resources is discharged, canceled, or expired.
Accounts payables are therefore not written off based on the time frame, while on the other hand, accounts receivables are written off when there is a substantial amount of time passed after the final payment time.
This is because of the prudence concept, which keeps the financial statements fairly to avoid the overstatement of income and assets and the understatement of expenses and liabilities.
Trade creditors and other liabilities can be written off in the following cases:
Liability discharge:
The obligation for payment to creditors and other parties is released when the liability is paid through either cash or other asset.
Liability is reduced to the extent of the value of resources paid. Suppose the liability is offset in some assets other than cash. In that case, the company has to recognize a gain or loss for the difference between liability offset and the value of the asset transferred.
According to some terms in the liability payment, a discount is provided to the liability payer if payment is made during some set duration.
This reduces the number of accounts payable and is recognized as a discount received. The following accounting double entry is processed to reduce the contractual obligation in this case:
Debit Accounts Payable balance
Credit Cash/Bank/Other assets
For example, the company purchased computers amounting to $4,000 on credit on 15 Dember 2019 from its local supplier. The company financial statements record the account payable amount of $4,000.
This account payable is discharged from the company’s financial statements when the company makes the payment to its supplier.
The payment could be by cash or other assets depending on the negotiation between the company and its supplier.
Once the payment is made, the double-entry should be as follow:
Debit Accounts Payable balance: $4,000
Credit Cash/Bank/Other assets $4,000
This entry will discharge the account payable from the company’s financial statements.
Write Off or Derecognize of Account Payable (Liability):
Trade creditors or accounts payables may be canceled, or write-off through some legal, operational law that entitles the payable party with the option not to pay the whole or partial balance.
This may also be because the creditor waives off the balance or has not followed the contractual terms of the contract.
In this case, the payable party can recognize the canceled balance as other income because of reduced cash outflows and because it is not related to the company’s primary operations.
The following accounting double entry is necessary by the entity to record this transaction:
Debit Accounts Payable balance
Credit Other income
For example, the amount of account payable to be canceled is also $4,000, the same as the above example, then here is the example of a journal entry:
Debit Accounts Payable balance: $4,000
Credit Other income: $4,000
This entry will write off the total or partial of the account payable that the creditor cancels from the company balance sheet. The impact will be on both the balance sheet and income statement.
Expiration of the term:
The contractual terms may specify that there must be a duration in which the creditor has to claim the balance from the debtor, or after such a duration, the creditor may not have the power to claim the balance from the debtor.
After the passage of such a duration, the entity has the option to write off the accounts payable balance following the accounting double entry below:
Debit Accounts Payable balance
Credit Other income
For example, the payable amount is $5,000 will be written off due to the contract term is expired, then the following is the entry to write off this account payable:
Debit Accounts Payable balance: $5,000
Credit Other income: $5,000
