Journal Entries for Accounts Payable Account
Have you ever wondered how the bookkeepers from a bookkeeping firm in Singapore record business transactions of a company? As long as a company do not stop operating, it needs some transactions for it to sell its products, acquire raw material, obtain services and so on. Among all, purchases make up a big part of those transactions that take place because the company will always need to purchase goods or services from suppliers to ease the manufacturing process (Also see Differences Between Financial Accounting and Cost Accounting). Some of the transactions may occur on credit (Also see Journal Entries for Credit Sales), and the amount that the company owes to its suppliers is the accounts payable.
To account for accounts payable, the accountants need journal entries too. They will report these amounts in the company’s balance sheet as current liabilities. Whenever the company makes a payment, the accountant will debit the accounts payable account. A series of events will occur when the company purchases goods and services from the suppliers. In this article, we will focus on the journal entries that the accountants will use to tackle the accounts payable account.
When the company buys some inventories (Also see Accounting – Methods of Estimating Inventory) on credit, it should debit the purchase account and credit the accounts payable account. Doing so creates a liability about the accounts payable. Note that only companies that use the periodic inventory system will pass the journal entries mentioned above to record the accounts payable liability. If the company implements the perpetual inventory system, it should debit the inventory accounts instead of the purchase account.
Sometimes, part of the inventories or all the inventories that the company has purchased on credit may be spoilt or not in good condition. If such a condition happens, the company can return those inventories to the supplier (Also see Accounting – How to Recognize Revenue When Rights of Return Are Present?), or he may request for a price reduction from the supplier. If the supplier has agreed to accept the goods returned or to reduce the price of those goods, the company should reduce the sum of its accounts payable liability by the amount reduced in its books. Then, the journal entries that it should make is to debit its accounts payable account and credit the purchase return and allowance account.
When a business owner runs a business, he may need to acquire some professional services, such as financial consultancy services or accounting services. He may choose to make the payment in the future, and this cause the accounts payable liability to come into place. To record the accounts payable liability, the business owner should debit the professional fee to the related expense account and credit the same amount to the accounts payable account.
Lastly, when the company settles the payment, that is to pay the amount it owed to the creditor or supplier, the accounts payable liability will reduce. To record this transaction, it should debit the accounts payable account and credit the cash account or bank account.