What is Due to Account?
Due to Account is an accounting term that denotes a liability account. It is the amount of funds due to another party and is found in the general ledger. The funds can be short term or long term, which means they due within one year or due at any point in time in the future. The account owed could be to an individual, another company, an external creditor, or even an internal department of the same company.
The transactions are recorded in the books as soon as they take place, even though there is no payment involved at the time of the transaction. Just like the Due to Account, Due from Accounts are also maintained.
Due from Accounts specify the amount expected from external parties or an internal department and are used to reconcile the funds payable and the funds receivable. The due to account is also known as account payable.
- Due to Account is an accounting term that denotes a liability account.
- It is the amount of funds due to another party and is found in the general ledger.
- The due to account will show a credit balance as it is a liability account. When an invoice for a purchase is received, the due to account will be credited, and an expense or asset account will be debited.
Due to Account vs. Due from Account
The two are essentially opposites. Due to account is the money an organization owes to others, whereas due from account is the money the organization is owed. When a credit transaction occurs, the buying organization will record an entry to accounts payable, and the selling organization will record an entry to accounts receivable.
Understanding the Accounting Point of View
A trial balance is a document that helps a business record all its transactions in an orderly manner. It is used to prepare financial statements. Liability accounts are accounts that show the amount of money that is owed by the business. The trial balance rolls up the information from the general ledger, which includes all the financial accounts of a business. The ledger is divided into two columns; debit and credit. The two columns show the due to and due from accounts.
The due to account will show a credit balance as it is a liability account. When an invoice for a purchase is received, the due to account will be credited, and another account will be debited. Once the payment is made, the due to account will be debited, and cash will be credited. The credit balance in the account will be the sum total of invoices recorded but are yet to be paid.
The due to accounts are recorded as credit accounts and show the business the amount payable to another source. The reconciliation of all the accounts is the primary purpose of maintaining a general ledger within the accounting statement.
The use of the two columns helps keep a check on all credit and debit accounts, using one statement. Therefore, the general ledger is not only used internally but is also by auditors and external parties to access the organization’s accounts.
Company 1 purchases goods from Company 2 on account (credit). The amount needs to be paid back in 15 days. Company 2 will record the sale as due from account, and Company 1 will record the purchase in the due to account as they have yet to pay Company 2.
Under the accrual method of accounting, the above transaction will be treated as a sale even before the money’s been paid. The organization receiving the goods or services on the account must record the liability no later than the date it was received. As the double-entry system is followed in accounting, a debit entry to an expense or asset account is also made. Therefore, the accrual system of accounting records transactions when they occur and not when they are paid..
The due to account is an extremely important item in a company’s balance sheet. If there is an increase in the due to account over a particular period, it means the organization is buying more goods or services on credit rather than paying cash. If it decreases, the organization is paying by cash rather than credit for goods and services.
The correctness and completeness of an organization’s financial statements depend on the due to account (accounts payable) process. A good process will include:
- The timely processing of accurate and legitimate vendor invoices
- Accurate recording in the appropriate general ledger accounts
- The accrual of all obligations and expenses that have not yet been completely processed
The effectiveness of the accounts payable will ultimately affect the company’s cash flows, its relationship with external parties, and its credit rating.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: