Accounts Payable

Definition

Accounts payable (A/P) or payables are the amount the company owes to its suppliers for the goods delivered or services provided by the suppliers. Likewise, they occur when the company buys goods or services on credit from its suppliers.

The accounts payable are the current liabilities that are shown on the balance sheet for which the balances are due within one year. In this case, the company has an obligation to pay to suppliers based on the credit term which is usually shown on supplier invoice. Credit duration in the credit term is usually 30 days, but it can vary depending on the type of business and the relationship between the company and its suppliers.

Journal Entry

When the company buys or purchases on credit, the liability will occur when goods or services are received. Hence the company will debit goods received or services expended and credit accounts payable as liabilities increase. In this case, goods can be inventory, fixed assets or office supplies, etc. and services can be consultant fee, maintenance, and advertising expense, etc.

The journal entry would look like:

Account Debit Credit
Inventory/Fixed Assets/Expenses xxx
A/P xxx

When the company makes payament to settle the payables, it will debit the accounts payable to clear it and credit cash as the payment results in the cash outflow from the company.

The journal entry would look like:

Account Debit Credit
A/P xxx
Cash xxx

Example:

On 23 June 2019, ABC Ltd. purchased inventory in $1,500 on credit from XYZ Supply Co., one of its regular suppliers.

And then it paid $1,500 to settle this debt on 22 July 2019.

What are the journal entries?

Solution

The journal entry on 23 June 2019:

Account Debit Credit
Inventory 1,500
A/P 1,500

The journal entry on 22 July 2019:

Account Debit Credit
A/P 1,500
Cash 1,500

Accounts Payable Aging

Accounts payable aging or A/P aging is the report used by the company to control and monitor its payables. The company that has many suppliers may need to use the A/P aging report to properly manage its payment to the supplier.

This is due to paying late may result in bad relationships with suppliers. Hence, it is important for the company to pay its suppliers on time. Making a payment on time usually results in the increase of good relationships with suppliers, and may lead to having a better purchase term in the long run.
A/P aging report shows all the payables classified by the day overdue of the payment which detail all suppliers that the company still owe to.

Example of A/P Aging:

Accounts payable aging

Accounts payable aging report template:

The accounts payable aging report template in the excel file of the picture above is in the link here: Accounts payable aging report excel

Accounts Payable vs. Account Receivables

Accounts payable are the amount that the company owes to its suppliers while account receivables are the amount that the customers owe to the company. The payables are current liabilities when the receivables are the current assets.

The payables when settled will result in the outflow of the company’s resource which is “the cash that will be paid out” while the receivables when settled will result inflow of economic benefits to the company which is “the cash that will flow in”.

It’s also useful to note that the company’s payables are the receivables of its suppliers. While the company shows accounts payable as current liabilities on its balance sheet, its suppliers show the account receivables as current assets on their balance sheet.

Example:

From the example above, ABC Ltd. purchased inventory in $1,500 on credit from XYZ Supply Co., one of its regular suppliers.

The journal entry for the both companies would be:

In the accounting record of ABC Ltd.                       while         In the accounting record of XYZ Supply Co.

Accounts payable vs accounts receivable

Accounts Payable vs. Trade Payables

Some companies treat the accounts payable the same as the trade payables. However, there is a small difference between accounts payable and trade payables.

Accounts payable in general refer to all payables owed to its suppliers and others including suppliers of inventory goods and other supplies of items or services while trade payables only refer to payables that the company owed its suppliers of inventory goods which are the items of its main business activities.

In this case, if the company has and uses the trade payables in its chart of account, the credit purchase of trade items, such as inventory, is usually recorded in the trade payables. And the other payables, which are not related to the main operation of the business, are usually recorded in accounts payable.

Example:

On 29 July 2019, ABC Ltd. purchased inventory in $2,000 on credit from XYZ Co. And on the same day, it also bought office supplies in $150 on credit from BA Book Store.

In the transactions above, ABC Ltd. recorded the journal entry as:

Account Debit Credit
Inventory 2,000
Accounts payable 2,000

Account Debit Credit
Office supplies 150
Accounts payable 150

If the company use trade payables in its general ledger, the journal entry would be

Account Debit Credit
Inventory 2,000
Trade payables 2,000

Account Debit Credit
Office supplies 150
Accounts payable 150