Updated July 14, 2023
Definition of Accounts Payable Example
Accounts payable refers to the money that a business owes to outsiders (known as creditors) for the goods & services received from them, and in other words, accounts payable is the obligations ( short term) of the business to pay off the current liabilities that includes creditors, bills payable, etc. In this topic, we will look at the Accounts Payable example.
Accounts Payable are the short-term liabilities (that must be discharged within one year) of the business entity. These liabilities are the amount payable to the suppliers or vendors that provided goods & services to that entity and are mostly created when the company purchases goods or receives services on a credit basis instead of paying cash in return at the time of such purchase of goods or rendering of service. The accounts payable are shown on the liabilities side of the balance sheet under the head current liabilities.
For example, ABC Company purchased goods on credit from Z Company worth $500 on 3rd February 2015, but ABC Company pays the amount on 5th April 2015. So till the final payment date, i.e., till 5th April 2015, Z Company will be recorded as creditors in the books of ABC Company under the head accounts payable.
Examples of Accounts Payable
Following are the examples of accounts payable:
Simple Example: X Purchased the goods on credit from Y, and the credit period allowed by Y is 30 days. So Y is the creditor for X, and the amount payable to Y is accounts payable. Various Examples of Accounts payable considering different situations are as under:
On 01.05.2020, X Purchased goods from Y amounting to $ 80,000, where the credit Period given is 31 days. X paid Y in full after 31 days, i.e., on 01.06.2020. Pass the necessary journal entry to record the above accounts payable transactions in X’s book.
Entry in books of X
|To Accounts Payable a/c||$80,000|
|(Entry to record credit purchases from Y worth $80,000)|
After 31 days, when payment is made
|01.06.2020||Accounts Payable A/c||$80,000|
|To Cash or Bank A/c||$80,000|
|(Entry to record payment of money against credit purchases on 01.05.2020)|
Payment is made before the due date to avail of the discount.
XLtd purchased goods from Y Ltd worth $ 100,000. Y Ltd gave the Trade Discount of 1% of the gross amount to X Ltd due to a bulk purchase by X. The credit period allowed in this case is of 30 days with the proposal that if the debtor pays within 15 days, then additional cash discount of 1 % of the amount payable will also be given. X Ltd paid the full amount after 10 days of purchase. Record the above transactions and pass the journal entries in the books of XLtd.
At the time of purchase of goods on Credit
|Purchases a/c||$ 99,000|
|To Accounts Payable or Y Ltd a/c||$ 99,000|
|(Entry to record credit purchase made from y Ltd. worth $ 100,000; trade discount allowed is 1%, i.e., 1,000)|
After 10 days, when payment is made
|Accounts Payable or Y Ltd A/c||$ 99,000.00|
|To Discount Received A/c||$ 990.00|
|To Cash or BankA/c||$ 98,010.00|
|(Entry to record amount paid to creditor Y Ltd. after receiving cash discount @ 1% for prompt payment, i.e., 990 ($99,000 * 1%)|
On 01.05.2020, AB Purchased goods from CD amounting to $ 70,000, where the credit Period given is 15 days. It is mentioned in the terms and conditions of the agreement that any damaged stock can be returned within 10 days from the date of purchase. On 09.05.2020, goods worth $ 5,000 were found to be damaged and thus returned back to CD. After 15 days, i.e., on 16.05.2020, AB paid the CD rest of the amount. Pass the necessary journal entry to record the above accounts payable transactions in AB’s book.
Entry in books of AB
|To Accounts Payable a/c||$70,000|
|(Entry to record credit purchases from CD worth $70,000)|
Entry at the time of the return of goods
|01.05.2020||Accounts Payable a/c||$5,000|
|To Purchase, return a/c||$5,000|
|(Entry to record return of goods worth $5,000)|
After 15 days, when payment is made
|16.05.2020||Accounts Payable A/c||$65,000|
|To Cash or Bank A/c||$65,000|
|(Entry to record payment of money against credit purchases on 01.05.2020 after deducting the value of returned items, i.e., ($70,000 – $5,000))|
Following are the transaction that X Ltd incurred during June -20
- 05.2020: Purchased goods worth $90,000 on credit from Y Ltd. and paid freight charges worth $1,000.
- 05.2020: Returned damaged goods worth $ 9,000to to the supplier
- 05.2020: Received professional Services on credit from M Ltd. worth $5,000
- 05.2020: Paid to the creditors for inventory purchased on 01.05.2020 and services availed on 07.05.2020.
Entry in books of X ltd.
At the time of purchase of goods
|To Y Ltd a/c||$90,000|
|(Entry to record credit purchases from Y worth $90,000)|
Entry to record the amount paid for fright
|01.05.2020||Freight in expense a/c||$1,000|
|To Cash or Bank A/c||$1,000|
|(Entry to record freight expense paid)|
Entry at the time of the return of goods
|01.05.2020||Y Ltd. a/c||$9,000|
|To Purchase return a/c||$9,000|
|(Entry to record return of goods worth $9,000)|
Entry at the time of receiving professional services
|07.05.2020||Professional Services a/c||$5,000|
|To M ltd a/c||$5,000|
|(Entry to record receipt of professional services)|
At the end of the month, when payment is made
|16.05.2020||Y ltd a/c||$81,000|
|M ltd a/c||$5,000|
|To Cash or Bank A/c||$86,000|
|(Entry to record payment of money against credit purchases and receipt of professional services on credit)|
Conclusion – Accounts Payable Example
Therefore, Accounts payable are the company’s short term obligations that are payable within one year to the company’s creditors, where the creditors are the suppliers or vendors that provide goods and services to the company on credit. The amount is yet to be paid against purchasing goods and services. Accounts payable is shown under the balance sheet as a current liability.
This is a guide to Accounts Payable Example. Here we also discuss the definition and examples of accounts payable and journal entries. You may also have a look at the following articles to learn more –