Accounts Payable – Explanation and Journal Entries
Accounts payable are obligations of a business that originate because of purchases made on credit (e.g. for raw material, finished goods etc.), the money is yet to be paid for these transactions. Accounts payable account can be created by anyone who buys goods or services on credit and promises to pay for them later. It can be a sole trader, a partnership firm or a full-fledged business.
It is a short-term liability and in simpler terms total amount which is yet to be paid by the business to its creditors as per the purchase book. Large firms using ERP packages replace traditional purchase book with purchase ledger control account.
It is also known as trade creditors, “AP” & “P2P” (Procure to Pay). Accounts payable are shown on the liability side under the head current liabilities (the left-hand side of a horizontal balance sheet).
Related Topic – Different types of Purchase Orders
Let us say a supplier extends credit to your business Unreal Pvt Ltd. and agrees that your business will be making a payment within 45 days of the date you are billed.
Now, you are billed 1,00,000 for goods bought on credit. The amount will be considered as dues to be paid or, in other terms, an “account payable” by your business till the supplier is paid. It is similar to the situation when a person has received his latest electricity bill where he is allowed to pay within the next 30 days. Now, it acts as payable for the individual until the time it is actually paid.
- Accounts payable are created when you buy goods on credit.
- Accounts payable should be paid back to the suppliers within the agreed period of time.
- They act as a short-term debt, hence shown on the liability side under the head “current liabilities” of the balance sheet.
Journal Entries Related to Accounts Payable
Below are two main scenarios linked to the accounts payable cycle, where, in the first case, the credit purchase is recorded, and, in the second case, the cash paid to the supplier is recorded in the books of accounts.
At the time of recording an invoice
|To Accounts Payable A/C||Credit|
(This can also be recorded at a particular vendor level subledger wise, in this case, the vendor who has raised the invoice will be credited)
At the time of paying an invoice
|Accounts Payable A/C||Debit|
|To Cash or Bank A/C||Credit|
(This can also be recorded at a particular vendor level subledger wise, in this case, the vendor paid will be debited)
>Read Accounts Receivable