The accounts payable journal entry is a simple yet very important concept in accounting. It is the initial step that entails documenting the money a business owes to its suppliers. Whenever a company purchases goods or services on credit, it has to make an accounts payable journal entry. This record aids in monitoring what the company owes and when it has to make payments. So, what does that mean in terms of journal entry for accounts payable? The answer is simple. With a purchase on credit, you debit the purchase or expense account, and credit the accounts payable. That indicates the business owes a balance.
This is information every student and professional in accounting should learn how to properly record. That rule holds true for everyone, from multinational corporations using SAP and Oracle software to mom-and-pop operations using basic ledgers. Poor accounts payable journal entries in SAP or manual records can result in costly mistakes for businesses.
What is Accounts Payable Journal Entry?
Every business purchases some goods or services. At times they take time to pay cash. Rather, they promise to pay later. When they owe money in such circumstances, it is known as accounts payable. It is a liability, which means that the business must pay this amount later.
An accounts payable journal entry records this liability. It means that a company has received something, but has not yet paid for it. This bokyo entry keeps the record straight. It enables the business to keep track of much it owes and to whom.
Journal Entry for Accounts Payable
A journal entry which is passed by a company when it makes a credit purchase is:
| Account | Debit | Credit |
| Purchase / Expense A/c | ₹XX | |
| Accounts Payable A/c | ₹XX |
That means the business received some service or purchased a product and now needs to pay the supplier. The second journal entry, when the business pays the supplier later, would
| Account | Debit | Credit |
| Accounts Payable A/c | ₹XX | |
| Bank / Cash A/c | ₹XX |
This settles the amount due.
Thus the account payable entry in journal consists of two parts.
- First, you would record the purchase on credit.
- Second, register the payment when it is made.
This is very base accounting, but very required. It is one of the important components of the double-entry system. The entry impacts the balance sheet as well as the profit & loss account.
Types of Account Payable Journal entry
Knowing the various types of accounts payable entries can help ease accounting. Payable entries vary for businesses based on their purchases and payment methods. Let us consider the different categories.
Purchase of Goods on Credit
This is the most common type. If a company purchases raw materials, finished products, or inventory on credit, it needs to record the accounts payable journal entry as follows:
| Account | Debit | Credit |
| Inventory / Purchase A/c | ₹50,000 | |
| Accounts Payable A/c | ₹50,000 |
Purchase of Services on Credit
The business sometimes hires contractors or service providers and pays them later. Here is the accounts payable journal entry example:
| Account | Debit | Credit |
| Professional Fees A/c | ₹10,000 | |
| Accounts Payable A/c | ₹10,000 |
Purchase Returns
If there is a return of goods to the supplier by the company then the entry is cancelled.
| Account | Debit | Credit |
| Accounts Payable A/c | ₹20,000 | |
| Purchase Return A/c | ₹20,000 |
Discount Received on Payment
Sometimes a business gets a discount for paying early. So that discount needs to be booked.
| Account | Debit | Credit |
| Accounts Payable A/c | ₹30,000 | |
| Bank A/c | ₹29,000 | |
| Discount Received A/c | ₹1,000 |
These types prove that accounts payables and receivables journal entries are subject to change depending on the transactions. They also teach that accounting is about capturing the right amount at the right moment in time.
Process of Accounts Payable
There is an organized process with every company on how they manage payables. This helps avoid mistakes. This overall process consists of the accounts payable cycle journal entries. This helps companies manage their money and keep their records accurate.
- Receive invoice or bill: When goods or services are delivered, the supplier bills you.
- Invoice to match purchase order: The accounting team verifies that the invoice aligns with what was actually ordered and delivered.
- Post to Accounts Payable Journal Entry: Now the business makes an entry in the system. It reflects the dues payable to the supplier.
- Schedule the payment: The business decides when to pay based on credit terms (e.g. 30 days).
- Make the payment: Finally the company pays and makes a second journal entry to eliminate the payable.
This entire cycle serves to maintain supplier happiness and accurate records. When companies use SAP or Oracle-type of powerful tools, it is happening automatically.
Accounts Payable Journal Entries in SAP
SAP is used by big, big companies, you know. It simplifies accounts payables. Accounts Payable is the set of accounts that records the amount you owe your creditors and how much you are paying consumers, it records your accounts payable journal entries in SAP automatically when you post an invoice.
Example in SAP:
- Invoice posted
Debit: Expense / Purchase
Vendor Account (Accounts Payable) — Credit
- Payment processed
Debit: Vendor Account
Credit: Bank
Accounts Payable Journal Entries in Oracle
Oracle has a similar kind of work process. Companies use it for tracking invoices and payments. The oracle accounting modules creates the accounts payable journal entries in oracle.
Example in Oracle:
- Payables Module — Enter Invoice
Debit: Expense or Inventory
Credit: Accounts Payable
- Invoices payment in Cash Management
Debit: Accounts Payable
Credit: Bank
Both systems lower errors and provide easy auditing. They also connect accounts payable to inventory, cash and expenses.
Examples of Accounts Payable Journal Entry
Now, let us go through a few accounts payable journal entry example to see how this works in real world. It is useful both for students and professionals.
Example 1 – Purchase of raw materials on credit
ABC Ltd purchases raw goods on credit for ₹1,00,000.
| Account | Debit | Credit |
| Raw Materials A/c | ₹1,00,000 | |
| Accounts Payable A/c | ₹1,00,000 |
Example 2- Pay the supplier after the 30 days of service, which might impact the cash flow of your business.
ABC Ltd pays the supplier 30 days later.
| Account | Debit | Credit |
| Accounts Payable A/c | ₹1,00,000 | |
| Bank A/c | ₹1,00,000 |
Example 3 – Service Purchase
XYZ Ltd purchases IT support services on credit for ₹25,000.
| Account | Debit | Credit |
| IT Services A/c | ₹25,000 | |
| Accounts Payable A/c | ₹25,000 |
These few examples guide you about what is journal entry for accounts payable under different conditions. These entries need to be matched with invoices and supported with documents.
Relevance to ACCA Syllabus
Account payable journal entries are covered in the Financial Accounting (FA) and Financial Reporting (FR) syllabus in ACCA. It helps students understand the recording of liabilities and Posting – Ledger under the double entry system and IFRS.
Accounts Payable Journal Entry ACCA Questions
Q1. What is the Journal Entry when a company purchases inventory on credit for 10,000?
A) Dr. Bank; Cr. Inventory
B) Dr. Inventory; Cr. Accounts Payable
C) Dr. Purchases; Cr. Revenue
D) Dr. Accounts Payable; Cr. Inventory
Answer: B) Dr. Inventory; Cr. Accounts Payable
Q2. Which of the following accounts is not included in an accounts payable journal entry?
A) Inventory
B) Accounts Receivable
C) Accounts Payable
D) Purchases
Answer: B) AR (Accounts Receivable)
Q3. Accounts Payable Account: What Type of Account Is It?
A) Asset
B) Income
C) Liability
D) Equity
Answer: C) Liability
Q4. What is the journal entry to record payment of a previously recorded payable of 2,000?
A) Dr. Purchases; Cr. Cash
B) Dr. Accounts Payable; Cr. Bank
C) Dr. Bank; Cr. Accounts Payable
D) Dr. Expense; Cr. Bank
Ans: C) Bank Dr, Cr Accounts Payable
Q5. What accounting principle needs recording payables at the time of an expense?
A) Going Concern
B) Accrual
C) Historical Cost
D) Prudence
Answer: B) Accrual
Relevance to US CMA Syllabus
The new US CMA 2020 syllabus revolves around External Financial Reporting Decisions and Working Capital Management. The significance of accounting payable journal entries in regards to cash flows, payables turnover, and short-term liabilities must be mastered.
Accounts Payable Journal Entry US CMA Questions
Q1. When an entity purchases something on credit, which account is credited?
A) Cash
B) Inventory
C) Accounts Payable
D) Retained Earnings
Answer: C) Accounts Payable
Q2. How does increasing accounts payable affect working capital?
A) Increases working capital
B) Decreases working capital
C) No change
D) Increases current assets
Answer: B) Reduces working capital
Q3. What is the best description of accounts payable?
A) A long-term loan
B) A customer owes money
C) Amount owed to suppliers
D) An investment in equity
Answer C) An obligation to pay suppliers
Q4. What is the correct entry when accounts payable are paid?
A) Dr. Accounts Payable; Cr. Bank
B) Dr. Expense; Cr. Bank
C) Dr. Purchases; Cr. Accounts Payable
Dr. Accounts Receivable; Cr. Cash
Answer: A) Dr. Accounts Payable; Cr. Bank
Q5. In what section of the statement of cash flows would you see payments to suppliers?
A) Investing Activities
B) Operating Activities
C) Financing Activities
D) Non-Cash Activities
Answer: B) Cash Flow From Operating Activities
Relevance to US CPA Questions
In FAR (Financial Accounting and Reporting), journal entries under US GAAP, such as liabilities such as accounts payable, are something that CPAs need to know. There are similar applications in Audit & Attestation in helping assess risk and test assertions.
Accounts Payable Journal Entry US CPA Questions
Q1. When should accounts payable be recognized under GAAP?
A) When the order is placed
B) When cash is paid
C) When invoice is received
D) When goods are shipped
Answer: C) Upon receipt of invoice
Q2. For example, a company makes a payment to a supplier of 5,000. What is the proper journal entry?
A) Dr. Expense; Cr. Bank
B) Dr. Bank; Cr. Accounts Payable
C) Dr. Accounts Payable; Cr. Bank
Dr. Accounts Receivable; Cr. Cash
Answer: C) Dr. Accounts Payable; Cr. Bank
Q3. Which of the following will be least affected by an increase in accounts payable?
A) Net Income
B) Current Liabilities
C) Shareholder’s Equity
D) Depreciation
Answer: Current Liabilities B)
Q4. What does a debit balance in accounts payable usually mean?
A) Normal balance
B) Overpayment or error
C) Understated expense
D) Revenue recognition
Answer: B) Overpayment or error
Q5. What happens if you don’t record accounts payable?
A) Overstated cash
B) Understated liabilities
C) Understated revenues
D) Overstated equity
Answer: B) Understated liabilities
Relevance to CFA Syllabus
In the FRA (Financial Reporting and Analysis) section of CFA Level 1, candidates study the impact of accounts payable like liabilities on liquidity ratios, cash flows, and a company’s overall valuation. Entries help to read and analyze the financial statements.
Accounts Payable Journal Entry CFA Questions
Q1. When is accounts payable shown on the statements?
A) Income Statement
B) Cash Flow Statement
C) Balance Sheet — Section Liabilities
D) Notes to Accounts
Answer: C) Balance Sheet — Liabilities section
Q2. Meaning that an increase in accounts payable means:
A) Cash transactions grow more frequent
B) Less inventory
C) Slow payments to suppliers
D) Early payment to suppliers
Answer: C) Payment is delayed to suppliers
Q3. What ratio increases when accounts payable increases (all else equal)?
A) Current Ratio
B) Quick Ratio
C) Cash Flow from Operations
D) Return on Assets
Ans: C) Cash Flow from Operations
Q4. How does accounts payable affect the DuPont analysis?
A) Affects net profit margin
B) Affects equity multiplier
C) Has an indirect effect on asset turnover
D) Has no effect
Ans: C. Affects asset turnover indirectly
Q5. A growing accounts payable turnover ratio indicates?
A) Company shortens time taken to pay suppliers
B) Company takes a bit longer to pay
C) Suppliers obtain more credit
D) Corporations borrowing for the long-term
Answer: C) Suppliers need to like them.
