Nature of account payable
Accounts payable of a company or business represents all the balances that it expects to pay in the future. Another name used for accounts payable is creditors. Companies that purchase from suppliers who offer credit terms usually accumulate accounts payable balances. At the end of each year, they present their accounts payable balances in their balance sheet.
By nature, accounts payable is a liability. Liability is an obligation that a company enters into due to the past transaction that it must settle at some point in the future. These obligations can come from many sources for the company. However, only the obligations that come as a result of the company’s operations and its dealings with vendors or suppliers become a part of its accounts payable balances.
Account Payable in Balance Sheet
Due to its nature, the accounts payable businesses of a company appears under its total liabilities in its Balance Sheet. The accounts payable balances of a company will almost always be a part of its current liabilities. It is because accounts payable usually represent short-term obligations that the company expects to pay within 12 months of the time it prepares its Balance Sheet.
However, if a supplier provides the company with better credit terms, for instance, more than a year, it must classify the accounts payable as non-current. Cases in which companies can classify their accounts payable balances as non-current are rare. However, some large suppliers may allow flexible credit terms. For example, a company purchasing heavy machinery from a large supplier may get better repayment terms as compared to small purchases from local vendors.
Is Accounts Payable Debit or Credit?
Whether accounts payable is debit or credit depends on the type of transaction. Because it is a liability, accounts payable is usually a credit. However, in some cases, it can also be debit. Generally, whenever the accounts payable balance of a company is increasing, it is a credit. However, when there is a decrease in it, then the company must use a debit entry.
The most common reason for credit in accounts payable is credit purchases. Whenever a company purchases goods with credit terms, it must credit accounts payable. On the other hand, the usual reason for a debit in accounts payable is cash repaid to suppliers resulting in a decrease in liabilities. Other reasons for debit in accounts payable include discounts or purchase returns.
When a company makes purchases from suppliers, it must debit its purchases account. On the other hand, it must increase its liabilities in case the purchases are on credit terms. The double entry for a credit purchase is as follows.
Usually, instead of using the “Account payable” account, companies use the name of the supplier from whom they made purchases. It allows them to organize their accounts payable balances better as compared to having all the balances under a single account.
Once the company repays the supplier, it must reduce the liability associated with it. Usually, companies repay their suppliers through either bank or cash. Therefore, the double-entry for repayment of accounts payable is as follows.
|Cr||Cash or Bank||x|
In case the company returns the purchased goods before having repaid the liability, it must also debit its accounts payable balance. It is because goods returned to supplier reduce the associated liability, assuming the supplier accepts returns. For payables for services, returning is not an option as services are perishable. The accounting entry for returns related to accounts payable is as follows.
A company, ABC Co., purchases goods worth $10,000 from a supplier, XYZ Co. It also purchases goods worth $5,000 from another supplier, RST Co. Both of these purchases are on credit. The double entries for the purchase made from XYZ Co. are as follows.
|Cr||Accounts payable (XYZ Co.)||$10,000|
Similarly, for the purchase made from RST Co., the double-entry is as follows.
|Cr||Accounts payable (RST Co.)||$5,000|
After a month, ABC Co. repays XYZ Co. for the related purchase made above. ABC Co. uses its bank balance to repay the liability. Therefore, the accounting entry to the accounts payable account is as follows.
Accounts payable is a liability for companies or businesses that they accumulate due to their operations. These represent short-term liabilities from suppliers in exchange for credit purchases. Accounts payable is a liability by nature and usually presented under Current Liabilities in the Balance Sheet. Usually, accounts payable is credit, but it can also be debit when decreasing.