Accounts Payable and it's Journal Entries
We all owe something to someone right!
The same goes for Countries, Governments, People or Businesses.
In the Accounting world, the amount that is owed is called an Accounts Payable.
Think of Accounts Payable simply as an I.O.U.
This I.O.U. originates when a company purchases anything on credit.
The total amount of Accounts Payable that a company owes can be found in a Financial Statement called the Balance Sheet under the Current Liabilities section.
Examples of Accounts Payable
A Supplier (Musk Inc.) supplies $100,000 worth of Widgets to Mars Inc. with the terms 45 days credit.
In this case, Mars Inc. would record the amount of $100,000 as an Accounts Payable on their books because they owe $100,000 to Musk Inc. in 45 days.
At the end of the 45 days, Mars Inc. would simply pay the $100,000 to Musk Inc. thereby settling the transaction.
(To learn more about terms of credit you can check out our article here.)
Journal Entries related to the above transaction
Like there are two sides to a coin, there are two sides to any Accounts Payable transaction.
One side is when an Accounts Payable gets created - i.e., when a company purchases something on credit.
At that time, the Bookkeeper records the Journal Entry as follows
Purchase A/c Debit
To Accounts Payable A/c Credit
After a certain period, the invoice gets paid in cash.
At the time of paying the invoice, the Journal Entry is
Accounts Payable A/c Debit
To Cash or Bank A/c Credit
What happens if the Accounts Payable is not paid on time?
It is inevitable in a credit-based business that circumstances or a lack of willingness will cause some customers to delay or default on their payments.
In such cases, the payables are considered to be in default.
The action that Businesses take when a debtor defaults can vary between
(Some people do consider sending Bruno with a baseball bat, but we do not recommend it!)
Is there a difference between an Accounts Payable and Trade Payable?
Some Accountants roll both the Trade Payables and the Accounts Payable in the same category.
Many people in the Business world also use the terms Accounts Payable and Trades Payable interchangeably.
While both of them are similar, they are not quite the same.
Trade payables primarily refers to the money a company owes to the suppliers of all material related to the Company Trade, i.e., Inventory while Accounts Payable include ALL other short-term debts.
For example, If a Bakery needs to pay a Supplier for Bread, that would be a Trade Payable, however, if a Bakery needs to pay money to it' local dry cleaner to launder the pastry chef's whites, that would be considered a Accounts Payable.
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