Ministry of Higher and Secondary Special Education of the Republic of Uzbekistan Tashkent State University of Economics

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 the 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 5^th 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 25^th 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

During February 2019, the Mid-term international ltd. did the transactions, as mentioned below. The company uses the periodic inventory system, and to account the discounts, the company uses the gross method.

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  Feb 02: Company purchased the inventory worth $ 50,000 with terms 2/10, n/30, FOB shipping point. Forthis, thefreightexpensescameto $ 500.
  
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  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 is received.
  
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  Feb 10: Paid the cash for the purchases made on Feb 02 to the creditors.
  

Prepare the necessary journal entries to record the transactions:
Solution:
Entries to record the transactions are as follows:
Account receivable is the amount which the company owes from the customer for selling its goods or services and the journal entry to record such credit sales of goods and services is passed by debiting the accounts receivable account with the corresponding credit to the Sales account.
Accounts receivables are the money owed to the company by the customers and accrual accounting system allows such type of credit sales transactions by opening a new account called accounts receivable journal entry.
Accounts receivables can be considered as an investment made by the business that includes both risks and returns. Returns in the form of easily acquiring new customers and risk in the form of non-payments called bad debts.

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  Accounts Receivables are asset accounts in the books of the seller because the customer owes him an amount of money to pay against the goods and services already delivered by the seller. Conversely, it creates a liability account in the books of customers called Accounts Payables.
  
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  The Balance Sheet categorizes Account Receivables as a current asset because sales made on credit are expected to get paid soon as per the credit terms mentioned in the invoice issued by the seller.
  
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  Generally, financial statements are prepared using the accrual accounting method that has been made mandatory by both GAAP & IFRS. Accrual accounting requires recording the revenues as for and when they are earned whether payments in cash is received or not.
  

E.g. The Indian Auto Parts (IAP) Ltd sold some truck parts to Mr. Unreal on credit. Since IAP has already incurred various expenses called the cost of goods sold (COGS) for the sales he has made but not been paid.
Now when Mr. Unreal Pays off his billing amount, the accounts-receivable account gets written off against payment received in cash. However, if payment is not received or is not expected to be received in the near future, then considering it to be losses, the seller can charge it as expenses against bad debts.
Let’s elaborate above example of Indian Auto Parts (IAP) Ltd and journalize the related transactions step by step:

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  On Jan 1, 2019, IAP ltd sold some truck parts to Mr. Unreal on credit. The calculated amount of invoice, including all expenses and taxes, was $10000 to be paid on or before Jan 31, 2019. Mr. Unrealmadefullpaymentof $10000 onJan 28, 2019.
  

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  Recording credit sales if IAP provides credit terms to its customers. Consider credit terms as 2/10 net 30 i.e., if paid within 10 days, a discount of 2% is offered; otherwise, payment must be made within 30 days without any discount.
  

Mr. Unreal pays his billing amount on Jan 8, 2019, and avails the discount.