Definition:
Accounts payable are the liabilities that the companies owe to their suppliers as the result of purchasing goods or rendering the services on credits.
For example, the company should record accounts payable as the result of purchasing USD1,000 in credits for a personal computer for staff.
Accounts payable are types of current liabilities which normally paid within one year from the purchasing date.
The company should record and recognize as payable at the time they record and recognize the expenses or assets of the same transactions.
For the rendering of services or purchase of goods that immediately pay off, recording of accounts payable is not necessary. Unless it is required by the control in the accounting system that entity is being used.
In case the payable is expected to be paid more than one year, then those liabilities should be recorded in non-current liabilities categories.
Sometimes people called accounts payable and sometimes they called trade payable. These two terms refer to the same thing.
Yet, some people claim that for those current liabilities that occur as the result of purchasing or rendering the kind of goods, materials, or services for the core entity’s business, those current liabilities should be recorded as trade payable.
For those current liabilities that occur as the result of the purchase of some kind of goods or material that is just for supporting an operation like administrative purpose, then those liabilities should be recorded as accounts payable.
If we want to know how much is the accounts payable at the end of the reporting date, let say 31 December 2019, we can go to the presentation of it in the balance sheet under the current liabilities section.
Here, we can see the total balance of accounts payable for both the balance as of 31 December 2019 and its comparative figure. The detail of accounts payable is normally in the note as well as its accounting policies.
Recognition and Measurement
Accounts Payable are the balance sheet items and the recognition of them is the result of the accrual accounting concept. If the entity accounting policies are using a cash basis, then the account payable is not applicable.
That means you are not required to record accounts payable in your financial statements.
However, if your accounting records are prepared in accordance with US GAAP or IFRS, then you should record and recognize accounts payable at the time your entity has a legal obligation to pay for the goods or services that just bought at the agreed amount per contract or invoices.
You could recognize accounts payable only if you have a contract or received invoices for the goods or services you purchase.
In some cases, the suppliers don’t send you the invoices at the time they deliver the goods.
If this is the case, then you should record the accrual liabilities at the end of the month based on the amount that you expect to be paid.
However, not all of those purchases could estimate the amounts to be paid. Sometimes it is difficult to project the total amount that we expected to pay.
In this case, we could skip those kinds of liability to records in the following month at the time invoices are received.
Over and under accrual are applied for this case.
Recording:
Recording accounts payable is quite straightforward. There is a number of information that you need to know to be able to record those payable into financial statements.
First, you know how much the amount owes to suppliers. This could be obtained from invoices, contracts or goods, and services that your company received from suppliers.
Sometimes you can check with goods received noted or similar kinds of documents. The date your company is liable to.
This is important for your cut-off consideration. And, finally the supplier name.
Here are the double entries for recording accounts payable:
Cr_Account Payable (Balance Sheet Item under current liabilities section) $XXXX
Dr_ Expenses (P&L item) or Inventories (Balance Sheet) $XXXX
For example, if the company purchases a computer on credit amount of USD1,000 on 31 December 2019, the company should record as the following:
Cr_Account payable USD1,000
Dr_PPE ( fixed assets_computer) USD1,000
This entry is made at the time the company recognizes the account payable. However, when the company makes the payment, the records should be as follows:
Dr_Account payable USD1,000
Cr_Cash or bank USD1,000
If the payment is made by cash, then credit should be a cash account and if the payment is made by a bank, then the credit should be the credit bank account.
Noted:
It depends on what kind of goods or services your company purchases. For example, if your company purchases trade inventories, then accounting records should be debited to those inventories in the balance sheet.
If your entity purchases some kind of office supplier and based on your entity’s accounting policies, office suppliers are immediately recognized as expenses.
Then, the debit should go to the office supply in P&L items for that period.
It is important to note that accounts payable is an increase in credit and a decrease in debt since it is in the liabilities classification.
It is a difference in the increase and decrease of assets that is contrarily affected.
Example of accounts payable:
Let’s see an additional example for a better understanding,
Your company purchased inventories of 10,000$ on credit within 20 days from your supplier name InvenP on 25 January 2016.
Your company is expected to pay sometime in February around 15 days from the purchasing date. You are the accountant and you are assigned to record this transaction in your company accounting system.
Here are the accounting records:
At the end of January or at the time of receipt of invoices:
In this stage, you need to recognize accounts payable that your company owes to suppliers in the month that suppliers delivered inventories to your company’s warehouse.
In this case, the payable amount should be USD10,000.
Another contra entry to the payable that you just recognize is inventories. This should be at the same amount, USD 10,000.
Remember, these two accounts are the balance sheet items. One is the assets, and another one is the liabilities.
Dr Inventories USD10,000 in Balance Sheet
Cr InvenP (Account Payable) USD 10,000 in Balance Sheet
At the time of payment:
Dr InvenP USD 10,000 in Balance Sheet
Cr Cash USD 10,000 in Balance Sheet
At the time of payment, there are two accounts that will be affected.
One is the liabilities.
The account is payable that your company owes suppliers. And second is the assets which are the cash that your company will pay to the supplier.
The effect will depend on the amount that actually paid. For example, the payments to this supplier are the full amount.
Then, the total effect would be USD 10,000 for both liabilities and assets.
Note, if your company pays the supplier through bank transactions like checks or bank transfers, then the credit would go to the account for the bank.
Whatever methods would be, they are all assets account and the effect will be on credit.
Account payable Vs Account receivable
Account payable and account receivable is the balance sheet item and both of these items are present only on the balance sheet at the end of the reporting period. They are not present in the income statement or statement of change in equity.
However, these accounts are different in certain areas as follows:
- Account payable is the current liability and account receivable is the current asset. The company will result in cash outflow when it makes payments to its supplies. However, the company will result in increasing its cash when the customer makes the payment.
- The double entries for accounts payable and accounts receivable are completely different. Account payable is increasing in credit and it is decreasing debit side. However, the account receivable is the current assets and the increase is on the debit side. Decreasing accounts receivable will result in the credit side.
How does purchase return affect account payable?
The company will record account payable when the company purchase goods or service on credit. However, in some cases, the company will return the goods that the supplier delivered with unacceptable quality, the goods that were not ordered, or the excess quantity.
Returning goods will result in decreasing liabilities that the company has recorded. For example, if the account payable that the company recorded initially was USD1,000. The value of goods that the company had return value USD100, then the entity will as the following:
Dr_ Account payable USD100
Cr_Purchase return USD100
The purchase return account is the contrast account of assets or expenses that were previously recorded.
Written by Sinra
