An account payable is an obligation (a current liability) that results when a company receives goods or services on credit. The provider of the goods or services is referred to as the supplier or vendor.
When a company receives a vendor invoice, it is reviewed, approved and recorded in the company’s general ledger with a credit to Accounts Payable (or Trade Payables) and a debit to at least one other account. Part of the review often involves a technique known as the three-way match. The name refers to the comparing of three documents: the vendor invoice, the company’s purchase order (PO) and the company’s receiving report.
Some vendor invoices allow for early-payment discounts, such as 1/10, net 30. These credit terms mean that a company can deduct 1% from the amount owed if the amount is paid within 10 days instead of the normal 30 days.
Under the accrual method of accounting, if a company has received goods or services as of the last day of an accounting period but has not yet recorded the vendor invoice in Accounts Payable, an accrual-type adjusting entry must be recorded. The adjusting entry will credit a liability account and will usually debit an expense or asset account as of the final day of the accounting period. To avoid any double counting when the actual invoice gets processed, a reversing entry is often processed on the first day of the next accounting period.
To safeguard its assets, every company should have internal controls to avoid duplicate payments and to avoid payments for fraudulent vendor invoices or invoices containing incorrect amounts.
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