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.

Example

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:

  1. It is a profit of the business, which means it will be recorded on the credit side of the profit and loss account.
  2. 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.

Adjusting Entry

(i)
Accounts Payable
(ii)
Provision for Discount on Creditors Account
(iii)
Creditors Account Excerpt
(iv)
Profit and Loss Account Excerpt
(v)
Balance Sheet Excerpt

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Frequently Asked Questions

What is an account payable?

Account payable is the money you owe to your suppliers for goods and services they send us.

How do I record payment of an account payable?

You will debit accounts payable, and credit cash or check (depending on how you pay). If you pay by check, it is advisable that you record the check number.

Is it necessary to record accounts payable?

Yes, you will need to record your accounts payable for the following reasons: - to correctly post transactions that are not on credit. - To accurately report inventory amounts. - To record unearned revenue. If we do not record this account we will not have a complete picture of our business and the money coming in and going out.

What is an adjusting entry?

An adjusting entry can be either a debit or credit one depending on whether your books were closed correctly or incorrectly at the end of the accounting period.

What is a provision for discount on creditors?

A provision for discount on creditors is an estimate of the amount you will receive when you pay your creditors their account payable balance in full. It represents an anticipated profit at the end of the accounting period and is created by adjusting the accounts payable account to deduct 5% of the balance (if you typically give a 5% discount for early payment).

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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