Accounts Payable Definition
Accounts payable are monies owed to the enterprise’s suppliers or vendors for the purchase of goods and services.
Most purchases take place on credit, and under the accrual basis of accounting, the liability must be recorded at the time title passes for the assets purchased or when the services are received, proper internal control procedures require using subsidiary accounts payable ledgers or a voucher register.
Traders also receive the benefit of the discount by making payment to the Creditors/Accounts payable within the prescribed time. In other words, it is an anticipated income, which a trader estimates by way of a certain percentage calculated on the closing balance of the Sundry Creditors. The following adjusting entry is passed to make the provision for discount on creditors.
Suppose on 31st December 2019 total Sundry Creditors of the business were $20,000. It is decided to create Provision for Discount on Creditors @ 5%.
Provision for Discount on Creditors/Accounts Payable = 20,000 x 5/100 = $1,000
Accounting Treatment of Accounts payable
The amount of Provision for Discount on Creditors/Accounts Payable is an anticipated profit of the business while on the other hand, it is a decrease in the value of Creditors. Provision for Discount on Creditors/Accounts Payable has the following two effects on final accounts:
- It is a profit of the business, therefore; it will be recorded on the credit side of Profit and Loss Account.
- On the other hand, it is a decrease in the value of liabilities (Creditors) therefore; it will be deducted from Creditors Account on the Liability side of the Balance Sheet.