How Do You Record Accounts Payable?
Accounts payable is one of the most critical line items on the balance sheet of any business, and recording it correctly requires some strict adherence to specific guidelines.
Accounts payable also known as AP is the amount that a business owes to its suppliers or vendors for the products or services purchased on credit. Recording accounts payable effectively is an aspect of the accounting process that affects the financial accounts and cash flow of the firm.
Below is a procedure on how to record accounts payable.
1. Create AP Sub-Ledgers
Open subsidiary accounts under the accounts payable general ledger to accommodate amounts due to specific vendors. This assists in sub-dividing and controlling payables to make them more effective. Some common AP sub-ledgers include:
- Trade accounts payable – inventory from suppliers and other supplies.
- Utilities, rent, fees, etc. expense accounts payable
- Current liabilities – Capital expenditure accounts payable – Machinery, equipment, building, furniture
2. Record Purchase Transactions
When goods or services are purchased on credit, record the following journal entry:
Debit: Self-checkout account (for purchase of expenses)
Capital expenditure account (for fixed assets or equipment acquisitions)
Credit: Accounts payable
The AP sub-ledger should capture the name of the supplier, date, invoice number, total amount payable, due date, and any other information. This generates a trail for the payable and reconciliation of the supplier statements.
3. Manage Discounts
A sizable number of suppliers provide some form of rebate for early payment. Utilize these discounts as often as possible to cut expenses. Make sure that the discounted amount is posted accurately in the AP balance.
4. Record Partial Payments
In large acquisitions, you might be able to make partial or even installment payments. Enter every payment transaction that you make into your accounting system software. This effectively helps in diminishing the payables outstanding to the supplier.
5. Pay Supplier Invoices
Ensure that when making payments, invoices are reconciled in the system and correct amounts are being paid in AP. Checks, electronic transfers, P cards, etc., are some of the most widely used methods of payment Payments should be recorded, and open invoices should be cleared.
6. Maintain Accurate AP Records
Ensure you have accurate AP sub-ledgers that will show the supplier’s names, the amount, and the date they are due. This assists in monitoring unpaid invoices to chase and ensure timely payment is made. When closing accounting books at the end of each month, ensure that all the opened AP balances are accurate.
7. Analyze AP Reports
Other important AP reports include the aged AP report that assists in determining whether payables are being paid on time. A high value of AP shows the company’s inefficiency in managing its working capital. Review reports every month and analyze fluctuations in the balances of AP.
Accounts payable management is critical in determining the actual position of liabilities of any business organization. It also builds better relations with the vendors, helps capture early payment discounts, and smoothens the working capital management. Accounts payable management is crucial to ensure that small businesses manage their money well when it comes to paying for the goods and services they purchase.
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