Concept of “Accounts Payable” in Accounting

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 p