This is a concept wherein, an organization has pending dues to be paid to suppliers who have supplied the products to them. Here, the organization purchases the products and makes a promise to make payment at a future date. The accounts payable of the organization are being recorded on the liability side of the balance sheet of the organization. The organization is being involved in following accrual method of accounting, therefore, liability for accounts payable is being recorded on the same day when it is being incurred. This occurs due to a simple reason that expenses in the organization are to be recorded by the organization when the expenses are incurred not when the expenses are being paid.
Accounts payable to the organization always has a credit balance. Therefore, when, the organization makes the payment towards accounts payable then, it is going to be a scenario that, accounts payable would be debited by the organization and cash or bank would be credited by it.
The process of Accounts Payable
The company has to ensure that, it makes payment of only actual bills. Therefore, the organization has to ensure that, it provides the following details in the entries being made by it in the course of entering the bills regarding purchases.
- Order of the company
- Product/service received
- Per unit cost or total cost
The organization should make sure that accounts payable are being recorded accurately and efficiently in the books of accounts as there is the omission in ensuring that, the right entry would result in the creation of two different accounts for showing wrong values. If the organization would not record a particular expense in a proper way then, following consequences will occur.
- Liability is not going to appear on the balance sheet
- Electricity expense will be omitted from the profit and loss account
If an entry is being made twice then, the expense and liability would be overstated and this particular thing is also not considered to be appropriate on the part of the organization in the area of doing the tasks at a particular point.
General Ledger Account: Accounts Payable
Accounts payable is a credit account, therefore, at the time of payment, another account is required to be credited. At the time when accounts payable are being paid in cash then, accounts payable is debited and cash is credited.
Recording of the invoice in accounts payable
At the time of recording accounts payable in books of accounts, the organization has to make sure that, it carries out checking of books in a proper way so that, no errors are being occurred in the course of entering the records. The invoice recording will have the inclusion of following items:
- Crediting the accounts payable
- Debiting another account such as asset account or expense account.
Journal Entry for Accounts Payable
Office Suppliers A/c dr 550
To Accounts Payable 550
Accounts Payable 550
To Cash 550
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