Accounts Payable: Definition
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 the title passes for the assets purchased or when the services are received.
Proper internal control procedures require the use of subsidiary accounts payable ledgers or a voucher register.
Accounts Payable: Explanation
The balances outstanding (i.e., 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 do not affect the total purchases on the debit side of the purchases account.
Traders also receive the benefit of the discount by making payments to the 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 adjusting entry shown below is passed to make the provision for discount on creditors.
Suppose that on 31 December 2019, the total sundry creditors of a business is $20,000. The decision is made to create a provision for discount on creditors @ 5%.
Therefore, 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. At the same time, it is a decrease in the value of creditors.
Provision for discount on creditors/accounts payable has the following two effects on final accounts:
- It is a profit of the business, which means it will be recorded on the credit side of the profit and loss account.
- It is a decrease in the value of liabilities (creditors), which means it will be deducted from the creditors’ account on the liability side of the balance sheet.
What better way to learn than to talk to an expert? Finance Strategists is happy to put you in touch with a financial advisor in Little Rock, AR. If you live outside the area, our financial advisor page will route you to a list of areas we are working in.