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Closing Entries For Accounts Payable (Example and Explanation)

Account Payable

Accounts Payable

Accounts payable form the largest portion of the current liability section on the company’s financial statements. It represents the purchases that are unpaid by the enterprise.

In the cash conversion cycle, companies match the payment dates with accounts receivables, ensuring that receipts are made before making the payments to the suppliers.

The lower the accounts payable days, the better. It reflects that the company can realize the cash in a good fashion.

An example would be: The Bold Fashions Ltd bought textile garments from Sri Textile traders as raw materials on credit. On the other hand, the Bold Fashions here got the inventory as a current asset while creating a short-term obligation.

General closing process

The accountant closes entries at the end of each accounting period involving revenues, gains, expenses, and losses. The accountant debits expenses, and incomes are credited to the income summary statement. The resulting balance on the income summary is net income.

Does Accounts Payable have closing entries

The nature of accounts payable is that of a permanent nature account. That means it would have a balance at the end of the year and be shown in the balance sheet.

It is not an income statement item in which accountants close at the end of each accounting period.

Accounts Payable and expense:

Accounts payable is on account of purchases being made on the account. The purchases are expenses items on the debit side of the income statement shown as the cost of goods sold.

Accounts Payable Journal Entries refer to the amount payable accounting entries to the company’s creditors for the purchase of goods or services. They are reported under the head current liabilities on the balance sheet, and this account is debited whenever any payment has been made.

Related article  Accounting for Purchase Returns - Entry, Example, and More

Journal entries for Accounts Payable:

Since the closing entries are not required for accounts payable, the following are required for accounts payable.
a. Purchase of goods or services on account

Date Particulars Debit ($) Credit ($)
  Purchases XX  
     Accounts Payable   XX
  (To record purchases made on credit)    

b. Purchases returned to suppliers

This is the case where the purchases made are defective or lack sufficient quality features to be sold in the regular market.

If the seller approves the return, the buyer has to reduce the accounts payable liability by that amount in his account books.

Date Particulars Debit ($) Credit ($)
  Accounts Payable XX  
    Purchases return and allowance   XX
  (To record purchases return )    

c. Expenses are incurred on account

This happens in service firms like law firms, chartered accountant firms, etc., where expenses are posted to accounts payable, increasing the liability side when made on the account.

Date Particulars Debit ($) Credit ($)
  Relevant expense XX  
     Accounts Payable   XX
  (To record a relevant expense on account)    

d. Payment made to the creditor

As agreed with the suppliers, the buyer has to make payment for the purchases he has made within the payment terms. The entries would be as :

Date Particulars Debit ($ ) Credit ($ )
  Accounts Payable XX  
     Cash   XX
  (To record payment to suppliers )    
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