When A Payment Is Made On An Account Payable?

Account payable, as used for products or services acquired from another company, is the sum due and paid within a designated term.

Another type of obligation is an account payable, which is the amount a company owes to vendors or suppliers for credit-driven purchases of goods or services. A vital operation every company has to do in its accounts payable cycle is creating and documenting payment vouchers. The following subjects will be covered in this blog article: what accounts payable are, the accounting treatment when a payment is made on an accounts payable, and some best practices that the company should think about.

What are payable accounts?

Accounts payable, or AP for short, are temporary obligations of a company entity resulting from credit-based purchases of goods and services. The company gets the goods or services instead of paying cash and then pays the value following a designated credit period instead.

Typical accounts payable forms include:

Creditor balances cover inventory, raw supplies, and other items bought on credit or sale terms.
Other costs include utilities, maintenance contracts, advertising, etc. for services provided by another company that come under other business.
Excellent records for payment on contracts and services rendered.

Initially recorded in his accounts payable, a corporation pays off these delinquent debts within the designated credit term. This balance shows the whole amount the company has agreed to pay its suppliers and vendors at a later period.

Techniques of Accounting Treatment Following an Accounts Payable Payment Made

The accounting procedure of a corporation paying an overdue account payable consists of two main steps:

Two main processes constitute the accounting procedure when a corporation pays an outstanding account payable:

Starting the payment procedure helps to reduce accounts payable, therefore affecting the value owed to that particular supplier. A credit transaction thus helps to balance the accounts due.

The payment amount tendered helps the cash account to record the real cash outflow when comparing the original budgeted amount to the actual paid amount. Not a good thing is the general drop in the total cash on hand resulting from this.

Should payment be made by check, the entry would be recorded in checks issued rather than debiting the Cash account. Should it be done electronically, the debited Bank Account will be the one.

Here is an illustration:

Raw Materials Supplier XYZ is a credit customer; so, the account balance shows just outstanding AP: $5,000. Payments Made to Supplier XYZ equal 3000$.

An entry into accounting would be $3,000 for accounts payable Cash 3,000.

This reduces the use of the checking account in the payment as well as the accounts payable line from Supplier XYZ to $2000.

Paying In Full vs. Part Payments

Regarding the invoices still in AP, the companies might settle them completely or pay some amount on sections. Consequently, in both of these two situations, the accounting treatment is the same. The main phases are:

1. Exactly the amount you are paying is shown on a creditor ledger.
2. Debit the bank or cash account for the same payment value.

The only variation is how it affects the AP balance left over:

Therefore, when an invoice is paid in full, accounts payable lose the entire amount on the invoice. Following payment distribution, the balance outstanding for that particular line item will equal zero.

Should only partial payment be made, just the amount matching the partial invoice will be credited. The accounts payable carry forward the balance, so the company has not yet paid the supplier or vendor this sum.

Appreciating the Function of Accounts Payable Payments: Some Suggestions for Ideal Practice

The following are some advised procedures companies should apply while handling and documenting account payable payments:

Apart from where there are policy or quality concerns, it is crucial to make sure payments are made on time following the agreed credit terms to prevent accruing costs or fines.

Before paying any invoices, be sure the payment amounts match by reviewing the invoice details and other relevant information. It is usual practice for accounting staff members engaged in check preparation to carefully review related invoices and documents before actual payment posting.

This is true whether the payment is online or by cheque, date, supplier name, cheque number, invoice number, amount, etc. This needs to be noted and matched with the exceptional AP balances.

One person in the accounting department is in charge of regularly reviewing the general accounts payable aging to guarantee no long payment terms.

Whereas least practicable, the company can pay before actual due dates to receive early payment discounts that strengthen the working capital.

Using ACH transfers or online banking bill payments to automatically make payments will assist reduce the amount of effort involved and the mistakes risk.

Following these accounts payable best practices will enable accurate financial reporting and improve relationships with suppliers through timely and well-ordered payments. Since it can run more efficiently, this helps the company to perform generally better.