Accounts payable is the amount that the company owes to its creditors or outsiders from whom it has brought goods or services. Total amount of accounts payable as on the date of balance sheet is classified under the head current liabilities.
It arises because of the time lag between receipt of goods, supplies or services and the payment of them. This time lag is generally known as terms of payment.
For a manufacturing unit, major part of the whole amount shown under the head accounts payable is the amount not paid to vendors for purchase of raw materials.
In addition to these, company also list expenses incurred which are due to be paid within 12 months from the report date. Expenses incurred but not paid as on balance sheet date, such as amount to be spent towards salary, rent are disclosed as outstanding or accrued expenses under the head current liabilities.
Similar to receivables, accounts payable is also a sub ledger that feeds the general ledger with detailed information.
Here is the actual process of recording accounts payable transactions. In a computerized system, the whole process is automated.
- Post credit purchases of goods and supplies incurred on credit to the appropriate vendor’s A/c.
- Post vendor purchases to the accounts payable sub ledger.
- Post summary of accounts payable to the general ledger.
For accurate accounting, vendor invoices for which bill has not received before close of the year or as on the balance sheet date has to be accrued through adjusting entries to the current period. Before taking this adjustment to the balance sheet, you need to confirm that the record of goods tally with the accounts payable.
In computerized system, accounts payable is automatically linked to other parts of the financial system to reduce entry errors.
A credit purchase is recorded by debiting purchase and crediting vendor A/c. Vendor A/c will automatically be shown in accounts payable (A/P) sub-ledger and A/P will be shown in general ledger.
Purchase return and allowances are recorded on the basis of credit memos received by debiting respected vendor A/c and crediting purchase return A/c.
At the time of making payments to parties, you debit vendor A/c and credit cash or bank A/c as the case may be.
Inventory and other major item purchases are among the biggest case drain of your company. By managing payment terms for these types of purchases, you can improve your cash flow situations. The first step in a new vendor negotiation from financial point of view is asking for credit that best suit your business.
