Accounts payable are amounts which are owed by you to your suppliers for the purchase of trade goods or services, they are sometimes referred to as trade payables or trade creditors. Under normal circumstances, they are normally unsecured, and non-interest bearing.
If your supplier allows you credit and invoices you for a product or service and you make payment at a later date 30 days 60 days etc, then while you owe the supplier the money the outstanding amount is classified as an accounts payable in your business.
Accounts payable are recorded in the balance sheet of the business under the heading of current liabilities, that means they are payable within a year.
Accounts Payable Process
The aim of the accounts payable process is to ensure that only approved supplier or vendor invoices are entered into the accounts payable system, and that payments to suppliers are made at the appropriate time.
The accounts payable process starts with a purchase order from the business to the supplier. The supplier then sends the goods with a delivery note together with an accounts payable invoice. On receipt, the goods are checked against the purchase order which is then matched to the invoice. In this way only invoices which have been properly approved are entered into the accounts payable system.
Accounts Payable Invoice Processing
Once approved the accounts payable invoice can be entered into the purchase day book or purchase journal.
If for example, purchases are made on credit from Supplier A for 500 and Supplier B for 800 the first entry would be to the purchases day book to record the purchases.
| Purchases Day Book | Page 1 | |||
| Date | Supplier | Invoice | Page | Amount |
|---|---|---|---|---|
| 8th Oct 2014 | Supplier A | Invoice 123 | Page 4 | 500 |
| 9th Oct 2014 | Supplier B | Invoice 456 | Page 7 | 800 |
| Total Purchases | 1,300 | |||
The purchase day book is part of the accounts payable system and records details of the date, supplier, accounts payable invoice reference number, general ledger page reference to which the account was posted, and the amount. The day book is not part of the double entry bookkeeping process and is simply a listing of accounts payable invoices.
The next stage of the accounts payable procedure is to enter the purchase day book details into the purchase ledger. The purchase ledger is a subsidiary ledger which is part of the double entry bookkeeping process.
The ledger contains a page for each supplier and records details of all transaction with that supplier including, accounts payable invoices, cash payments, and adjustments. The balance on each suppliers account represents the outstanding balance to that supplier, and the total of the purchase ledger balances is the accounts payable balance, and represents amounts owed by the business to suppliers.
| Supplier A | Page 4 | |||
| Date | Account | Page | Debit | Credit |
|---|---|---|---|---|
| 8th Oct 2014 | Purchases | PDB 1 | 500 | |
| Supplier B | Page 7 | |||
| Date | Account | Page | Debit | Credit |
| 9th Oct 2014 | Purchases | PDB 1 | 800 | |
| Total Accounts payable | 1,300 | |||
Accounts Payable Bookkeeping Entry
The bookkeeping entry to record an accounts payable invoice is to debit the purchases or expense account and credit the accounts payable account.
| Account | Debit | Credit |
|---|---|---|
| Purchases or expense | 1,300 | |
| Accounts Payable Account | 1,300 | |
| Total | 1,300 | 1,300 |
The credit entry to the accounts payable account is either to the subsidiary purchase ledger or to the accounts payable control account in the general ledger depending on which one the business sees as part of the double entry system.
Accounts Payable Payment
Payment to the supplier should be made at the appropriate time in order take advantage of any discount being offered by the supplier for early settlement.
When a supplier invoice has been entered and approved for payment, the double entry bookkeeping journal entry to make the payment is as follows:
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable Account – Supplier A | 500 | |
| Cash | 500 | |
| Total | 500 | 500 |
The payment has been made to Supplier A, the debit to the accounts payable account clears the original invoice posted to the supplier account, and the credit to cash reflects the cash going out of the business to the supplier.
Accounts Payable Reconciliation
The accounts payable normal balance is a credit balance. Additional invoices added to the account will increase the credit balance, and payments to suppliers will reduce the balance. In addition there will be adjustments relating to discounts taken, error corrections, supplier debit notes for returned goods etc. and each of these will affect the balance on the account.
The accounts payable formula reconciles the beginning and ending balances on an accounts payable account.
At the end of each accounting period, the closing balance on each supplier account can be reconciled to the independent statement received from the supplier. This statement shows the balance the supplier thinks is outstanding and, if the closing balance on the supplier accounts payable account does not agrees to the statement, then the purchases, payments, and adjustments each need to be checked to understand why, and appropriate correcting entries made.