By John W. Day, MBA ACCOUNTING TERM: Accounts Payable An account payable is normally an unsecured, non-interest bearing current liability, owed by the company to a vendor for the purchase of trade goods or services. FEATURE ARTICLE: Accounts Payable Accounting If you are a small business owner or manager and you are having trouble keeping track of all those outstanding bills that have to be paid each month, perhaps you need to set up an accounts payable system. Some small businesses may not need to have a full-blown accounts payable system to manage the payments of their monthly debts. This is usually because the nature of the business has minimal vendor purchases, cash flow is adequate enough to pay all bills within 30 days, and the routine bills to pay each month are predictably the same. Other small businesses do require an accounts payable system because their situation is exactly the opposite. They have many vendors and need extended credit to make sure inventory is purchased in a timely manner. They also need the flexibility to pay bills as cash becomes available. To understand how an accounts payable system works, you must have a grasp of the “accounts payable formula”. It is set up like this: Beginning accounts payable (last month’s ending balance) Add purchases on account Subtract cash payments on account Add or Subtract adjustments Ending accounts payable balance XXXXXX XXXXXX XXXXXX XXXXXX XXXXXX
There are two ledger accounts to keep track of: 1) The “detail accounts”; and 2) the “control account”. The detail accounts relate to each individual vendor’s account and the control account relates to the summary of all the detail accounts. Fortunately, we have computers that take the drudgery out of posting all the detail information to the various ledgers.
Copyright © 2008 John W. Day
Here’s an overview of how an accounts payable system works: Let’s say you are a small mom & pop retail corner grocery store. You have a contract with fifteen or so vendors to keep your store stocked with goods to sell. You anticipate how much of each item you are going need and place your orders accordingly. You use a purchase order (PO) system to keep track of your orders. When the orders are delivered you check to see if they are correct. If so, you can enter the invoice into a “purchase journal”. The purchase journal records what you bought, who you bought it from, the date purchased, the amount, and the general ledger account to which the item is posted. Since you are using a computer, all the information is automatically disbursed from the Purchase Journal into two other ledgers: 1) the individual vendor’s ledger (detail accounts); and, 2) the general ledger (Accounts Payable control account). You can generate a report from these ledgers that will show every entry made. For instance, the Vendor Ledger report will show, by vendor, every item you purchased, any adjustments, and any payments made to his/her account. The Detail of the General Ledger report for the Accounts Payable control account will show every entry made to each vendor’s account by the date occurred. It also shows which ledger or journal the entry came from so an audit trail can be followed. An Accounts Payable Aging Report can be run that shows the outstanding balances owed to each vendor by how old the debt is. These outstanding amounts are arrayed by thirty, sixty, ninety, one hundred twenty days, and over. Accounts payable accounting procedures are straightforward, if you remember how debits and credits work. If you have forgotten, click on this link to my accounting model diagram for a review. http://www.reallifeaccounting.com/accounting_model.asp
When you purchase goods or services you may be increasing an asset account (Inventory) or an expense account (Rent or Utilities, etc.). An increase to an asset or an expense account requires a debit entry. At the same time, you are incurring a liability because you are not...