Sometimes an organization may receive goods or get services from a supplier or vendor in advance and will pay the supplier or vendor on a future date. In this case we can say that the organization is buying goods or services on credit (on account). Sometimes the organization give a promissory note to the supplier or vendor that the organization give a signed document containing a written promise to pay the amount to the supplier or vendor or the bearer at a known date or on demand. When the organization does not offer such promissory note then the organization will record it’s liability as a Accounts Payable. Accounts payable also known as Trade Payables. The supplier of goods or services is known as creditor. As the normal balance of accounts payable (liability account) is credit balance, when recording this liability the organization will credit accounts payable and debit purchases. And when this liability will be paid accounts payable will be debited and cash or bank will be credited with same dollar amount which was initially recorded at the time of purchase. Following accrual accounting method the organization will record this liability on the same date when the goods or services are received and on the same date an asset account or expense account will be debited.
How to record accounts payable liability in the general journal? Let’s take an example of a purchase on credit. An organization purchases a repair service on credit from Roto-Rooter (it is North America’s #1 plumbing repair and drain service company) for an amount of $1000.
This raise in accounts payable is cancel out by a decline in equity (due to an increase in expense). Anyhow, the raise in accounts payable could also have been canceled out by an increase in an asset, with no impact on equity.
This is very important to control the amount of money owed to suppliers. This is controlled by using the accounts payable sub-ledger. For accounts payable, the control account in the general ledger includes the total amount of credit balances in the individual sub-ledgers.
Following is an example of a purchases journal used to record daily transactions.
Notice every debit (either repairs & maintenance, legal, supplier etc) has a credit in the accounts payable control account.