Accounts Payable Journal Entry: Types & Examples

When a company purchases goods or services on credit, they need to record the transaction in their accounting system. An accounts payable journal entry is used to record these transactions. Accounts payable refers to the outstanding amount a company owes its creditors for goods and services purchased. 

Continue reading to understand the account payable journal entries and the accounts payable process. 

What is the Journal Entry for Accounts Payable? 

Any transaction related to purchasing goods or services on credit results in an accounts payable liability. This liability is recorded based on the sellers’ invoice.

Types of Accounts Payable Journal Entries:

The following are the various types of accounts payable an enterprise needs to record in their books of accounts.

Journal entry for the purchase of inventory on credit

The following is the journal entry for the purchase of goods or other inventory on credit:

Journal entry for returning the damaged or undesirable inventory to the supplier

The following is the journal entry for returning damaged inventory or inventory no longer required to the supplier: 

Journal entry for assets purchased on credit 

The following is the journal entry for purchasing assets on credit, such as equipment, furniture, tools, plant, or other similar fixed assets: 

Journal entry for services received on credit

The following is the journal entry for services received on credit, such as consultancy, audit, legal services, etc.:

Journal entry for payment made to the creditor

The following is the journal entry for the payment made to the creditor: 

How Should Accounts Payables be Recorded?

To record accounts payable, the business needs to pass a journal entry that debits the expense or asset account and credits the accounts payable account. The debit amount is the purchase cost, whereas the credit amount represents the obligation to make the supplier.

Here’s an example of how accounts payable journal entries are recorded in the books of accounts: 

On 14th June, ABC Ltd. bought raw materials worth Rs 50,000 on credit and promised to pay ABC Ltd. on 25th June. Here are the journal entries for this transaction:

This journal entry shows ABC Ltd has increased raw materials by Rs 50,000 by debiting the raw materials account and increased its accounts payable balance by the same amount. This means ABC Ltd. owes its supplier Rs 50,000, which must be paid by 25th June. 

Let’s now take a look at the entry to be recorded in the books of ABC Ltd. when they pay their supplier on 25th June: 

This journal entry shows that ABC Ltd. has decreased its accounts payable by Rs 50,000 as well as its cash balance by the same amount. ABC Ltd has settled its obligation to its supplier and no longer owes any money.

What is the Accounts Payable Process? 

The accounts payable process involves the recording and tracking of the company's liabilities for goods or services received but not paid for. It includes the following steps:

1. Receiving invoices: When a company purchases goods and services, they receive invoices from vendors in various formats, including paper or email.
2. Review and approval: The invoices are reviewed for accuracy and validity. This step also involves the matching of the invoice with the goods/services received and the corresponding purchase orders or agreements. The matching process may vary depending on the enterprise.
3. Recording the invoice: Once verified and approved, the invoice is recorded in the company's accounting system. The details typically include the vendor’s name, invoice number, invoice date, payment due date, the amount owed, and applicable discounts or terms.
4. Payment: The accounts payable department determines the payment terms and schedules payments based on the agreed-upon terms with the vendor. This includes considering the payment due date, any early payment discounts available, and the company's cash flow situation. The accounts payable manager must keep a check on all invoices to ensure that they are paid on time. On the due date, the payment is made using methods such as issuing checks, making electronic funds transfers, or using online payment platforms.

By effectively managing the accounts payable process, a company can maintain strong relationships with its vendors, ensure timely payments, avoid late fees or penalties, and accurately track its financial liabilities.