General Ledger Account: Accounts Payable
The general ledger account Accounts Payable or Trade Payables is a current liability account, since the amounts owed are usually due in 10 days, 30 days, 60 days, etc. The balance in Accounts Payable is usually presented as the first or second item in the current liability section of the balance sheet. (Many companies report Notes Payable due within one year as the first item.)
As a liability account, Accounts Payable is expected to have a credit balance. Hence, a credit entry will increase the balance in Accounts Payable and a debit entry will decrease the balance.
A bill or invoice from a supplier of goods or services on credit is often referred to as a vendor invoice. The vendor invoices are entered as credits in the Accounts Payable account, thereby increasing the credit balance in Accounts Payable. When a company pays a vendor, it will reduce Accounts Payable with a debit amount. As a result, the normal credit balance in Accounts Payable is the amount of vendor invoices that have been recorded but have not yet been paid. The unpaid invoices are sometimes referred to as open invoices.
Accounting software allows companies to sort its accounts payable according to the dates when payments will be due. This feature and the resulting report are known as the aging of accounts payable.
Entering a vendor invoice into Accounts Payable
Prior to entering a vendor invoice into Accounts Payable, the invoice should be reviewed and approved. The reason is that a vendor invoice may contain errors (incorrect quantities, incorrect prices, math errors, etc.) and some invoices may not be legitimate.
After a vendor invoice has been approved, the recording of the invoice will include:
- a credit to Accounts Payable, and
- a minimum of one debit to another account. The debit amount usually involves one of the following:
- an expense (Repairs & Maintenance Expense, Advertising Expense, Rent Expense, etc.)
- a prepaid asset (Prepaid Expenses, Prepaid Insurance)
- a fixed or plant asset (Equipment, Fixtures, Vehicles, etc.)
A listing of the accounts that a company has available for recording transactions is known as the chart of accounts.
A report that lists the accounts and amounts that are debited for a group of invoices entered into the accounting software is known as the accounts payable distribution.
Reductions to Accounts Payable
When a company pays part or all of a previously recorded vendor invoice, the balance in Accounts Payable will be reduced with a debit entry and Cash will be reduced with a credit entry.
Accounts Payable is also debited when a company returns goods to a vendor or when the vendor grants an allowance.
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