Accounts Payable

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on June 22, 2021

Accounts Payable Definition

The Accounts Payable is a liability account that represents debts owed to the creditors of a business. Most purchases take place on credit, and under the accrual basis of accounting, the liability must be recorded at the time title passes for the assets purchased or when the services are received, proper internal control procedures require using subsidiary accounts payable ledgers or a voucher register.

Explanation

The balances outstanding (unpaid) on all suppliers’ accounts are listed at the end of the trading period. The total for accounts payable is taken to the credit side of the trial balance, its final destination being under the heading of current liabilities on the statement of Financial Position. Payments made to creditors in settlement of their accounts payable does not affect the purchases total on the debit side of purchases account.
Traders also receive the benefit of the discount by making payment to the Creditors/Accounts payable within the prescribed time. In other words, it is an anticipated income, which a trader estimates by way of a certain percentage calculated on the closing balance of the Sundry Creditors. The following adjusting entry is passed to make the provision for discount on creditors.

Example

Suppose on 31st December 2019 total Sundry Creditors of the business were $20,000. It is decided to create Provision for Discount on Creditors @ 5%.
Provision for Discount on Creditors/Accounts Payable = 20,000 x 5/100 = $1,000

Accounting Treatment of Accounts payable

The amount of Provision for Discount on Creditors/Accounts Payable is an anticipated profit of the business while on the other hand, it is a decrease in the value of Creditors. Provision for Discount on Creditors/Accounts Payable has the following two effects on final accounts:

  1. It is a profit of the business, therefore; it will be recorded on the credit side of Profit and Loss Account.
  2. On the other hand, it is a decrease in the value of liabilities (Creditors) therefore; it will be deducted from Creditors Account on the Liability side of the Balance Sheet.

Adjusting Entry

(i).
Accounts Payable
(ii).
Provision for discount on creditors account
(iii).
Adjusting Entry for provision for discount on creditors or accounts payable
(iv).
Provision for discount on creditors
(v).
Provision for discount on creditors

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