Accounts payable (abbreviated as A/P) is a specific accounting term for a current liability relating to items that have been received or invoiced but not yet paid. A typical set of entries for accounts payable are:
When the item is received – Debit Expense and Credit Accounts Payable
When payment is made – Debit Accounts Payable and Credit Cash
The result of the entry is that expense is debited and cash is credited, and accounts payable nets to zero. Although accounts payable will show on the balance sheet as a liability at the end of a period, eventually for any item, accounts payable must net to zero.
Accounts payable is only used in accrual accounting. Under cash accounting, expenses are recorded when paid, and there is no payable, or liability recorded. Accounts payable for items received and placed into inventory are treated the same as for expense.
The timing of recording accounts payable depends on the type of product or service purchased. A supply or equipment item is recorded when the item is received, not when it is ordered. A service would be recorded when it is complete, unless it stretches over several periods, in which case it should be allocated to the correct period if possible.
Reconciling Accounts Payable
The total of accounts payable account in the general ledger will show as a current liability account on the financial statements. This account should always tie to the total value of the unpaid invoices.
Often invoices are charged to accounts payable and something happens to cause the account to be out of balance, such the payment not equaling the invoice. This can happen when:
- Items are missing from the invoice, such as tax or freight
- Duplicate invoices are entered or paid. For this reason, payments should only be made off original invoices, not copies. A well-designed computer system should not issue checks for a duplicate invoice.
- Discounts are not recorded appropriately. Discounts should be credited to a purchases discount account when the invoice is paid, not as a reduction of accounts payable.
Three Way Matching
The best method to prevent errors in paying invoices is to use three-way matching. The purchase order, receiving slip and invoice should all match where possible.
The exact nature of the item and the quantity should match in all three documents. If an item is ordered, but not received, it should be on backorder or the cancelled off the purchase order.
In order to pay, the invoice must match the other two documents. Taxes and freight may not be on the purchase order, but accounts payable should check the amounts for reasonableness.
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