Definition of Accounts Payable Example
Accounts payable refers to the money that a business owes to the 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.
Basically, Accounts Payable is the short-term liabilities (that have to be discharged within a period of one year) of the business entity. These liabilities are the amount that is 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 credit basis instead of paying the cash in return at the time of such purchase of goods or rendering of service. The accounts payable is shown on the liabilities side of the balance sheet under the head current liabilities.
For example ABC Company purchases goods on credit from Z Company worth $500 on 3rd February, 2015 but the 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 credit period allowed by Y is 30 days. So Y is the creditor for X and amount payable toY 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. After 31 days period i.e., on 01.06.2020, X paid to the Y in full. 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 whenpayment 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 due date to avail the discount.
XLtd purchased goods fromY Ltd worth $ 100,000. Y ltd gave the Trade Discount of 1% of the gross amount to the X ltd due to 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 condition 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 period i.e., on 16.05.2020, AB paid to 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 return of goods
|01.05.2020||Accounts Payable a/c||$5,000|
|To Purchases 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 value of returned items i.e., ($70,000 – $5,000))|
Following are the transaction that were incurred by X ltd 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 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 pad 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 return of goods
|01.05.2020||Y Ltd. a/c||$9,000|
|To Purchases 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 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 a period of one year to the creditors of the company where the creditors are the suppliers or vendors that provides goods and services to the company on credit and the amount is yet to be paid against such purchase of goods and services. Accounts payable is shown under the balance sheet as current liability.
This is a guide to Accounts Payable Example. Here we also discuss the definition and examples of accounts payable along with journal entries. You may also have a look at the following articles to learn more –