What Are Accounts Payable?
Accounts payable, in simple terms, refers to the money that a company owes to its suppliers or vendors for goods or services it has received but has not yet paid for.
Imagine it like a tab or a credit account at a store: when a company orders supplies or services, they often don’t pay for them immediately.
Instead, they receive an invoice or bill from the supplier, which goes into their “accounts payable.” This account keeps track of all the money the company needs to pay its suppliers.
It’s a bit like when you eat at a restaurant. You order food, eat it, and then get the bill. Until you pay that bill, your obligation to pay for the meal is similar to a company’s accounts payable.
Just like you’re expected to pay the restaurant, a company is expected to pay its bills, usually within a set time frame, like 30, 60, or 90 days.
This helps companies manage their cash flow, as they don’t have to pay for everything immediately and can use their funds for other important things in the meantime.
Journal Entry of Account Payable
To illustrate the journal entries for recognition and derecognition of accounts payable, let’s consider a simple example. Assume a company, ABC Ltd., orders supplies worth $1,000 on credit.
Recognition of Accounts Payable
When ABC Ltd. receives the supplies and the invoice, it recognizes the obligation to pay the supplier. The journal entry to record this transaction would be:
This entry increases the company’s supplies or inventory (an asset) and also increases its accounts payable (a liability), reflecting that the company now owes money to the supplier.
Derecognition of Accounts Payable
When ABC Ltd. pays off the $1,000 it owes to the supplier, it needs to derecognize (remove) this liability from its books.
The journal entry for the payment would be:
This entry decreases the company’s accounts payable (a liability) and also decreases its cash or bank balance (an asset), reflecting the payment made to the supplier.
Organization of a Company’s Balance Sheet
A balance sheet reports a company’s assets or statement of financial position of a company, liabilities, and shareholders’ value for a particular period.
The balance sheet shows what a company possesses and owes, just as the sum contributed by shareholders. The balance sheet is separated into 3 significant classes:
Assets:
- Cash and cash equivalents
- Marketable securities
- Accounts receivable or cash owed to a company by their clients
- Stocks
Liabilities:
- Obligation including the long-term obligation
- Lease and utilities
- Wages
- Dividends payable
Shareholders’ value:
Shareholders’ value is the sum that would become back to shareholders if all the company’s assets were sold and every one of its debts reimbursed.
Shareholders’ value is determined by taking a company’s absolute assets and subtracting its all-out liabilities.
Recording Accounts Payable (AP)
Appropriate double-entry accounting requires that there must consistently be a counterbalancing charge and credit for all sections made into the general record.
To record accounts payable, the accountant credits accounts payable when the bill or receipt is received.
The charge counterbalance for this entry is run-of-the-mill to a business ledger for the great or administration that was bought using a credit card.
The charge could likewise be to an advantage account if the thing bought was a capitalizable resource.
At the point when the bill is paid, the accountant charges accounts payable to diminish the liability balance.
The counterbalancing credit is made to the money account, which likewise diminishes the money balance.
For instance, envision a business that gets a $500 receipt for office supplies.
At the point when the AP office gets the receipt, it records a $500 credit in accounts payable and a $500 charge to office supply cost.
The $500 charge to office supply cost courses through to the pay proclamation now, so the company has recorded the buying exchange even though money has not been paid out.
This is by gathering bookkeeping, where costs are perceived when acquired as opposed to when money changes hands.
The company at that point covers the tab, and the accountant enters a $500 credit to the money account and a charge for $500 to accounts payable.
A company may have many open installments because of sellers at any one time. Every exceptional installment because of merchants is recorded in accounts payable.
Subsequently, on the off chance that anybody takes a gander at the balance in accounts payable, they will see the aggregate sum the business owes the entirety of its sellers and short-term loan specialists.
This aggregate sum shows up on the balance sheet. For instance, if the business above likewise got a receipt for garden care services of $50, the aggregate of the two passages in accounts payable would rise to $550 before the company took care of those debts.
Accounts payable is a liability since it’s cash owed to loan bosses and is recorded under current liabilities on the balance sheet. Current liabilities are short-term liabilities of a company, commonly under 90 days.