Accounts Payable Ledger Definition Examples Step By Step

Accounts Payable Ledger Definition

It tracks specific payable information for every invoice, including:

Invoice DateInvoice NumberName of Supplier/VendorOrder QuantityAmount Payable

The general ledger account balance for accounts payableAccounts PayableAccounts 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 is compared to the ending accounts payable ledger balance to ensure that both accounts are matching. This comparison is made as part of the period-end (quarterly/yearly) closure process.

Example of Accounts Payable Ledger

Let us analyze the below example for more understanding:

The purchase transactions for Titan Sports Gear Company are:

March 12: Purchased $20,000 of merchandise inventory, with terms of 2/15 n 45, FOBFOBFOB is an abbreviation for Freight On Board. It is also referred to as free on board. FOB is a legal term that refers to the point at which the risk and cost of the goods being shipped are transferred from the selling party to the buying party.read more destination from Mighty Sun SuppliersMarch 18: Returned merchandise worth $3,000 damaged during the March 12 shipments.March 27: Paid for the merchandise of the March 18 purchase from Mighty Sun Suppliers less the return and discount.

The accounting transactions were recorded under the perpetual inventory method in the following accounts payable journals entriesAccounts Payable Journals EntriesAccounts Payable Journal Entries refers to the amount payable accounting entries to the creditors of the company for the purchase of goods or services and are reported under the head current liabilities on the balance sheet and this account debited whenever any payment is been made.read more:

Purchase Journal

Merchandise Inventory A/C Dr……………………………………………$20,000

Accounts Payable A/C……………………………………………………………$20,000

Cash Disbursement Journal

General Journal

These journals would be further posted in the Accounts Payable as below:

Vendor Account: Mighty Sun Suppliers

The vendor/subsidiary ledgerSubsidiary LedgerA subsidiary Ledger is a list of individual accounts that bears a similar nature. It refers to an expansion of the conventional general ledger separately used to record all the transactions related to the accounts payable and accounts receivables in a detailed manner.read more would accordingly be updated for Might Sun Suppliers as:

As we can see from the above tables, the vendor balance for Mighty Sun Suppliers is $0 (NIL), and the accounts payable balance is also $0 (NIL). Since both of them are precisely matching, it is not essential to prepare an entire schedule of accounts payable. If any balance amount is pending, a separate schedule of accounts payable would be required.

The treatment for Accounts Receivable would also be in a similar manner.

However, there needs to be some caution and consistency required to be maintained. This example is just for one supplier and one month. There could be multiple entries and multiple vendors for a firm. Hence, there should be a proper mechanism with no room for errors sinceReconciliation is the process of comparing account balances to identify any financial inconsistencies, discrepancies, omissions, or even fraud. At the end of any accounting period, reconciliation involves matching balances and ensuring that debits (credits) from one account for one transaction is same as the credit (debits) to another account for the same transaction.read more reconciliationReconciliationReconciliation is the process of comparing account balances to identify any financial inconsistencies, discrepancies, omissions, or even fraud. At the end of any accounting period, reconciliation involves matching balances and ensuring that debits (credits) from one account for one transaction is same as the credit (debits) to another account for the same transaction.read more can be a difficult.

Issues in Matching

Below are the ways through which the General LedgerGeneral LedgerA general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations. read more control can get out of sync with the Accounts Payable:

A manual entry has been made in one of the books, and no other record has been maintained. It will make reconciliation difficult.Posting to General Ledger (GL) from the Accounts payable module may have been turned off at some point in time. It is especially in the case of computerized recording of entries.A posting task may have been interrupted due to human error or power failure during the job. A transaction log should be considered for out-of-balance entries. If a complete batch is missing, the invoice history should be compared with the ledger.All posting may occur successfully at the time of entry, but the file got damaged in the interim. As a prevention method, copies of the file should be stored physically or electronically.

Advantages of Accounts Payable Ledger

This ledger can offer a quick snapshot of the current vendor balances.It’s useful as a model for internal control and audit purposeAudit PurposeThe primary purpose of an audit is to conduct an independent and unbiased verification of all financial and non-financial material information to ensure that it is in line with what the management has reported.read more.Managers and bookkeepers can compare the subsidiary balance with the general ledger balance to prevent errors.It further helps in the segregation of duties amongst employees. There would be a separate employee recording the transaction and another one checking for potential errors. It will ensure efficiency and strong internal controlInternal ControlInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company.read more.This information can be used to create an aging report that will further show the vendor’s name with individual overdue notices. It also highlights the outstanding amount for every invoice that has gone unpaid. The changes in Cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more caused would also get highlighted.Additionally, if there is an increase in late invoices, it may highlight problems with the accounts receivableAccounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year.
read more collections. It points out that customers are taking longer than usual to pay, which may require immediate attention.

Conclusion

The existence of an Accounts Payable ledger is not mandatory but preferable for keeping the books of accounts clean and organized. Such ledgers help keep track of payments receivable and payable for multiple years. It is a critical tool during the audit process and can be successfully linked in case of investigating individual entries.

Chartered Accountants or individuals with a degree in commerce background can perform such tasks, making it easier for small offices and vendors to maintain such accounts.