Many companies operate in a supply chain facilitating converting material to finished goods. In this process, a company purchases raw materials from a supplier. Once they get those items, they put them through a manufacturing process to alter them. In some cases, companies may also sell them further without much modification. Most companies profit through this process.
Like sales, companies can acquire goods and services for credit. It allows them to process those items and sell them before potentially paying off their purchase costs. This way, they can generate revenues and use those proceeds to reimburse the supplier. For this process, the accruals concept in accounting applies to purchases like sales. Here, it creates an accounts payable balance, which is a liability.
Accounts payable are prevalent for companies that operate in the manufacturing and retail industry. The accounting for accounts payable balance falls under the accruals concept of accounting. Once companies make a credit purchase, they can use the journal entries for account payables. Besides that, there are several other accounting entries involved in the process. However, it is crucial to understand accounts payable.
What are Accounts Payable?
Accounts payable are balances in the balance sheet representing money owed to suppliers. These are amounts that companies must pay. In accounting, accounts payable represent an obligation to repay the party at a future date. This definition classifies these balances as liabilities in the balance sheet. Usually, they fall under current liabilities. However, accounts payable may differ from other obligations.
Accounts payable represent money owed to suppliers or other business parties. Any debt to third parties outside operations is still a liability. However, they do not classify as accounts payable. These balances come from suppliers from whom they purchase on credit. In some cases, they may also include parties that the company may repay due to their business activities.
Accounts payable are liabilities in the balance sheet since they represent obligations due to past events. They generate when companies purchase an item or various products from a supplier for credit. Usually, it involves repaying the supplier at a future point in time. Therefore, they also result in outflows of economic benefits in the future. Most accounts payable balances last shorter than 12 months. Hence, they categorize as current liabilities.
Accounts payable are crucial for businesses that operate in specific industries. Like sales, customers require suppliers to facilitate credit purchases. Most suppliers must conform to this request to attract customers and increase sales. For companies providing credit sales, it is an account receivable balance. In contrast, the customer recognizes an accounts payable balance in their books.
Overall, accounts payable represent money owed by a customer to the supplier. This obligation is a part of the customer’s books. For the supplier, it involves a receivable balance. Accounts payable are short-term liabilities that companies usually settle within 12 months. These liabilities arise from a company’s operations. They do not include obligations from transactions outside operating activities.
What is the accounting for Accounts Payable?
The accounting for accounts payable is straightforward. However, it is crucial to understand how the process works to know the different stages involved. This process starts when a company purchases goods from a supplier. If the company pays the supplier at the transaction time, they cannot recognize an accounts payable balance. However, if the purchase is on credit, they must record it.
When a company purchases goods on credit, they recognize an accounts payable balance. As mentioned, this balance creates an obligation to repay the supplier in the future. Therefore, it meets the definition of a liability set by the contextual framework of accounting. Companies recognize the money owed to the supplier at the transaction time. Once they record this amount, it appears under current liabilities in the balance sheet.
The accounts payable balance remains in the books until the company repays the supplier in the future. Once they decide to reimburse the supplier, they may pay them in cash or through a bank. This transaction will decrease the accounts payable balance for the amount paid. Suppliers also set a credit limit before which companies must reimburse them. If they fail to do so, they may face penalties or interest expenses.
Apart from repayment, accounts payable balances may also decrease for other reasons. For example, purchase returns can give the cause a reduction to the account. Contra entries can also impact the accounts payable account while decreasing accounts receivable amounts. However, repayments usually represent the most common reason for reducing accounts payable balances.
Companies may have an accounts payable policy that dictates when they repay their suppliers. However, it does not impact the accounting for those balances. Overall, the most common entries in the accounts payable account include purchases and repayments. The former increases the account balance while the other decreases it. Apart from these, other transactions can also impact the accounting for accounts payable.
What is the journal entry for Accounts Payable?
As mentioned above, there are several steps involved in accounting for accounts payable. Each stage can have a different impact on the balance in the payable account. Therefore, companies must use the appropriate journal entry for accounts payable based on the step involved. As mentioned, two stages are most common in this process. These include credit purchases and repayments.
When a company acquires goods on credit, it must create an expense in the books. This expense goes into the debit side of the journal entry. However, it also increases liabilities until the company repays the supplier. This aspect concerns the journal entry for accounts payable. This way, companies can record the amount as an obligation. Overall, the journal entry for accounts payable for credit purchases is as follows.
On the other hand, companies also repay this amount in the future. This repayment represents a decrease in liabilities while also reducing assets. Companies may choose to reimburse the supplier through bank or cash. Therefore, the credit side of the journal entry may differ. In contrast, the debit side will remain the same and impact the accounts payable balance. Overall, the journal entry for accounts payable for repayment is as below.
|Cash or bank||XXXX|
A company, ABC Co., purchases goods on credit from different suppliers. During an accounting period, the company acquires products worth $10,000. However, ABC Co. does not pay the suppliers at the transaction time. Therefore, this amount will increase the company’s accounts payable balance. ABC Co. uses the following journal entry for accounts payable to record the purchases.
ABC Co. eventually settles half of the amount in the same accounting period. The company repays its suppliers through its bank account. Therefore, the repayment will represent a decrease in the accounts payable account. The company uses the following journal entry for accounts payable to record the reimbursement to suppliers.
The remaining $5,000 will remain in ABC Co.’s books until it repays its suppliers. This balance will appear under current assets in the balance sheet. Once ABC Co. reimburses its suppliers, it can remove the residual balance in the accounts payable account.
Accounts payable is an account that holds the balance owed to suppliers for credit purchases. Companies use this account to record obligations towards business parties. Usually, the accounting for accounts payable involves two stages, credit purchases and repayments. Other steps may also exist, although they are not common. The journal entry for accounts payable will also differ based on the stage.