Accounts Payable Definition
Accounting for Accounts Payable
The balances outstanding (i.e., unpaid) on all suppliers’ accounts are listed at the end of the trading period.
Payments made to creditors in settlement of their accounts payable do not affect the total purchases on the debit side of the purchases account.
Traders also receive the benefit of the discount by making payments to the accounts payable within the prescribed time.
In other words, it is an anticipated income, which a trader estimates by way of a certain percentage calculated on the closing balance of the sundry creditors.
The adjusting entry shown below is passed to make the provision for discount on creditors.
Provision for Discount on Creditors Example
Suppose that on 31 December 2019, the total sundry creditors of a business is $20,000. The decision is made to create a provision for discount on creditors @ 5%.
Therefore, provision for discount on creditors/accounts payable = 20,000 x 5/100 = $1,000.
Accounting Treatment of Accounts Payable
The amount of provision for discount on creditors/accounts payable is an anticipated profit of the business. At the same time, it is a decrease in the value of creditors.
Provision for discount on creditors/accounts payable has the following two effects on final accounts:
- It is a profit of the business, which means it will be recorded on the credit side of the profit and loss account.
- It is a decrease in the value of liabilities (creditors), which means it will be deducted from the creditors' account on the liability side of the balance sheet.
(i) (ii) (iii) (iv) (v)
Provision for Discount on Creditors or Accounts Payable FAQs
Account payable is the money you owe to your suppliers for goods and services they send us.
You will debit accounts payable, and credit cash or check (depending on how you pay). If you pay by check, it is advisable that you record the check number.
Yes, you will need to record your accounts payable for the following reasons:- to correctly post transactions that are not on credit. - To accurately report inventory amounts. - To record unearned revenue. If we do not record this account we will not have a complete picture of our business and the money coming in and going out.
An adjusting entry can be either a debit or credit one depending on whether your books were closed correctly or incorrectly at the end of the accounting period.
A provision for discount on creditors is an estimate of the amount you will receive when you pay your creditors their account payable balance in full. It represents an anticipated profit at the end of the accounting period and is created by adjusting the accounts payable account to deduct 5% of the balance (if you typically give a 5% discount for early payment).
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.