Journal Entries for Accounts Payable

Whenever there is any transaction related to the purchase of goods or services on the account, there arises the liability known as accounts payable liabilityAccounts Payable LiabilityAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more. It is to be created and recorded in the books of accounts by the company. The amount is measured using the seller’s invoice to document the journal entries for accounts payable. It usually contains information regarding the amount that the buyer has to pay and the due date.

Below are some common situations wherein the accounts payable journal entries are to be maintained.

Typical Accounts Payable Journal Entries

#1 – Purchase of the merchandise inventory on account:

When there is a purchase of the merchandise inventory on account, by using the following journal entry, the liability relating to the accounts payable journal entries will be created:

The journal entry passed above for recording the accounts payable liability will be made under the periodic inventory systemPeriodic Inventory SystemPeriodic Inventory System is a method of inventory valuation in which inventories are physically counted at the end of a specific period to determine the cost of goods sold.read more. However, if the company uses the perpetual inventory systemPerpetual Inventory SystemPerpetual Inventory System in accounting means maintaining real-time purchase and sale of inventory using an automated computerized system and readily calculates Cost of Goods Sold (COGS) for a manufacturing concern. It eradicates the efforts earlier consumed in the physical verification of stock.read more, the debt part would be replaced by the “inventory account” instead of the “purchases account.” The entry, in that case, will be as follows:

#2 – Damaged or undesirable inventory returned to the supplier:

In case the part of inventory or whole of the inventory purchased on the account is found by the buyer to be damaged or undesirable. He may either return the same to the seller; or ask for the allowance as a reduction in prices. If the seller approves the return or the allowance, then the buyer will reduce the accounts payable liability by that amount in his books of accounts. In such cases, the journal entry that will  pass for reducing the liability of the accountsLiability Of The AccountsLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more payable is as follows:

Note: The entry for the return of goods or allowance will not be recorded in the general journal as mentioned above in case of a separate Purchase return. If the buyer maintains an allowance journal and then returns, an allowance will be recorded in that purchase return and allowance journal.

#3 – Entry when there is the purchase of assets other than the merchandise inventory on account:

In case there is the purchase of assets other than the merchandise inventory on accounts like the plant, furniture, equipment, tools, or other fixed assets. The entry to record accounts payable liability is as follows:

#4 – Entry when the expenses incurred on account of the services purchased on account:

When any person acquires any professional services like financial consultancy, legal services, etc., or incurs the expenses for which the payment is to be done on any future date, then in that case.

Suppose some professional services (such as market and legal services, etc.) are acquired, or expenses are incurred, and the payment is to be made in the future. In that case, the accounts payable liability comes into existence. The entry to record accounts payable liability is as follows:

#5 – Entry when the payment is made to the creditor or to payable:

After the creation and recording of the accounts payable liability, when the payment is made to the creditor or to payable, then there will be a reduction in the accounts payable liability, and the same will be recorded by making a journal entry as follows:

Examples of Accounts Payable Journal Entries

The Journal Entries that are typically used to record the accounts payable are as follows:

Accounts Payable Journal Entries – Example #1

On 5th February 2019, Sports international ltd purchased the raw material worth $5,000 from smart international ltd on the account and promised to pay for the same in cash on 25th February 2019. Prepare the necessary journal entries to record the transactions.

Solution:

Entries to record the transactions are as follows:

Accounts Payable Journal Entries – Example #2

In February 2019, the Mid-term international ltd. Did the transactions, as mentioned below. The company uses the periodic inventory system to account for the discounts using the gross method.

  • Feb 02: Company purchased the inventory worth $ 50,000 with terms 2/10, n/30, FOB shipping point. For this, the freight expenses came to $ 500.Feb 04: It was found that out of the purchases, damaged goods were received worth $ 10,000, so it was returned to the supplier, and credit was received.Feb 10: Paid the cash for the purchases made on Feb 02 to the creditors.

Prepare the necessary journal entries to record the transactions:

This article has been a guide to Accounts Payable Journal Entries. Here we discuss the most common type of journal entries for accounts payables along with practical examples. You can learn more about accounting from the following articles –

  • Accounts Payable CycleExamples of Accounts PayableAccounts Receivable vs Accounts PayableAccrued Expenses vs Accounts Payable