Accounts payable is a frequently used account”it is used whenever a company buys anything on credit. This might be inventory, office supplies, or equipment. When the merchandise is received, the company debits the appropriate account for whatever is received, such as company debit inventory if inventory was received; or debit office supplies if any office supplies was received, and credits Accounts payable. When payment is made, the company debits Accounts payable which decreases the amount that is owed”as the company maid a payment, it no longer owes that amount and credits Cash.
Let™s use another example.
On August 23, 2002, the company receives office supplies purchased on credit:
8/23/02′ ‘ ‘ ‘ ‘ ‘ Office supplies ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ 1,250
‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ Accounts payable ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ 1,250
(To record receipt of office supplies purchased on credit)
On September 15, 2002, the company sends its payment for the office supplies:
9/15/02 ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ Accounts payable’ ‘ ‘ 1,250
‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ Cash ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ 1,250
To record payment on account:
Many companies offer their customers an incentive to get them to pay their bills faster. This is called a cash discount. If the selling company offers a cash discount, the discount will be specified on the invoice, usually with a notation that reads something like 2/10, n/30.™™ That notation is read, 2 percent discount if paid within 10 days; otherwise full payment expected in 30 days.™™ The terms can be anything a company wants to offer. The company simply adjusts the notation to reflect the terms it is offering, such as:
- 1/10, n/30”1 percent discount if paid within 10 days; otherwise full payment is due in 30 days
- 1/15, n/20”1 percent discount if paid within 15 days; otherwise full payment is due in 20 days
- 2/10, n/20”2 percent discount if paid within 10 days; otherwise full payment is due in 20 days
For the seller, the cash discount is called a sales discount. If the discount is taken on a purchase, it may be called a purchase discount.
If a company takes a discount, it doesn™t have to send quite as much money as it has recorded as the amount of the payable. If we ordered office supplies and the bill was for $1,000, the entry to record the purchase is:
XX/XX/XX ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ Office supplies’ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ 1,000
‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ Accounts payable’ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ 1,000
‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ (To record purchase of office supplies on credit)
The invoice indicates that there is a 2 percent discount available for paying within 10 days. If we pay within 10 days, then we have to send only $980 [$1,000 “ ($1,000 x 0.2)]. So the entry will be:
XX/XX/XX’ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ Accounts payable’ ‘ ‘ ‘ ‘ ‘ ‘ ‘ 1,000
‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ Cash’ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ 980
‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ Needed to balance’ ‘ ‘ ‘ ‘ ‘ 20
‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ (To record payment on account)
As you can see, we will need to credit some account for $20 in order to balance the account. What account should get the $20? We have a choice of which account to credit. If we took the discount on the purchase of an asset or the insurance of an expense, we can reduce the asset or expense by using the credit to offset the original debit. The other option is to record the discount as revenue. If we want to record it as revenue, we should set up discrete revenue account and call it something like Cash discounts, to distinguish it from the main revenue account. We also do not want to call the account Purchase discounts,™™ as that title will be used in Chapter 17. Commonly, the credit will simply go to the original account debited. In this case, that account would be office supplies. The entry would therefore be:
XX/XX/XX ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ Accounts Payable’ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ 1,000
‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ Cash’ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ 980
‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ Office supplies ‘ ‘ ‘ ‘ ‘ ‘ ‘ 20
‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ (To record payment on account)
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