Introduction:
Accounts payables are the credit balances the company owe to vendors or other companies for the supply of goods or services.
Accounts payable are of credit nature in accounting terminologies which will increase when the company buys more services or inventory.
This will create a credit entry in the books of the company hence increasing accounts payables.
When the company pays for the inventory purchased from a vendor or pays for services, a debit entry is recognized in the books of the company hence decreasing accounts payables.
Accounts payables are presented in the current liabilities section of the balance sheet.
Reasons accounts payables increase or decrease:
When a company performs its daily operations, they come through many actions or procedures that lead to either an increase or a decrease in the accounts payables.
These accounts payables will increase when the further obligation is put over the company by supplying services or goods while decrease when these obligations are revered through paying funds. In the following section, we will discuss the reasons for the increase or decrease in accounts payables.
Purchase of inventory:
A company will increase its accounts payables when they buy further inventory from their vendors. A company updates their books with accounting double entry when they buy inventory. A credit entry is processed to the accounts payable account which increases this balance.
However, an equal amount should be debited to another account. The value of inventory purchased is debited to the inventory account in the books of the company.
This equally debits the inventory and credit the accounts payable account. The following double entry is performed.
Dr_Inventory
Cr_Accounts Payables
Foreign exchange loss:
When a company buys products from a foreign country, they face an exchange gain or loss risk.
When the exchange rate moves against the favor of the buyer company, the number of accounts payable will increase hence recognizing a loss in the company’s accounts. The company will perform the following double entry
Dr_Exchange loss
Cr_Accounts Payable
Cash Paid to Vendor:
Different terms for accounts payables are agreed with by different vendors. These accounts payables may be payable in 30, 60, or 90 days depending on the creditability of the company.
After the agreed term, the company will pay cash equal or partial of the accounts payables. This will decrease the accounts payable for the company.
When the cash is paid, accounts payable is debited hence reduced, while cash is credited hence reduced from the bank or company’s cash reserves. The following accounting double entry is performed when cash is paid.
Dr_Accounts payables
Cr_Cash/ Bank
Foreign exchange gain:
When a company buys products from a foreign country, they face an exchange gain or loss risk.
When the exchange rate moves in favor of the buyer company, the number of accounts payable will lower down hence gaining an exchange gain for the company. The company will perform the following double entry.
Dr_Accounts Payables
Cr_Exchange gain/income
