How to Record Payments in Accounting?
Recording payments in accounting can otherwise be referred to as “accounts payable,” which means the total amount a given company owes to companies or suppliers for products or services. Furthermore, the accounts payable balance is reflected in the balance sheet, specifically in the current liabilities section, and includes all invoices that are due to be paid.
For example, a company that just purchased its office supplies from Company B and received an invoice of $500 should record the amount in its accounts payable sub-ledger and pay it on or before the due date to improve its cash flow and avoid late penalty fees.
Accounts Payable vs. Accounts Receivable
Accounts payable and accounts receivable are accounting concepts used in accrual accounting to record transactions when cash is not exchanged. Accounts payable are recorded by a company when it purchases goods and services on credit and will make payment in a future period. Accounts payable are considered current liabilities of the company.
Accounts receivable is the opposite, as it is where a company records the sale of its goods or services to another but has not yet collected any funds. Accounts receivable are considered current assets of the recording company.
Example of How to Record Payment in Accounting
Let’s say a company called Bags Unlimited sold 100 nylon bags to Company B, and both companies agreed on a certain payment due date. Bags Unlimited sends its invoice and writes the due date as December 15, as agreed by both parties. It records the transaction as an accounts receivable while Company B records it as an accounts payable.
Is Accounts Payable a Debit or a Credit?
The question above does confuse some due to the terminology used in accounting. For example, accounts payable are considered a debt of a company because they involve the purchase of goods on credit. However, in double-entry accounting, an increase in accounts payable is always recorded as a credit.
Credit balance in accounts payable represents the total amount a company owes to its suppliers. Once the invoice is received, the amount owed is recorded, which consequently raises the credit balance.
When the invoice is paid, the amount is recorded as a debit to the accounts payable account; thus, lowering the credit balance. The higher the accounts payable, the higher its credit balance is, and the lower the accounts payable, the lower its credit balance.
The Accounts Payable Process
The accounts payable process looks like an easy task, but it entails very careful scrutiny of invoices because the slightest errors can spell huge losses for a company. In fact, all companies, especially the big and long-standing ones, need to adopt an automated accounts payable system to make sure the following process is accurately performed.
1. Receipt of an invoice
The first step is the receipt of the invoice, which can be done through various channels such as email, fax, or courier.
2. Forwarding to the right individual
Because it can just arrive by mail or through the company’s email, it must be forwarded to the appropriate person, who may be the accountant, manager, bookkeeper, or the accounts payable specialist, if there is such a position.
3. Inputting details
Once it reaches the hands of the correct person, the details of the invoice are then inputted into a file such as a spreadsheet or an accounting system, which is saved.
4. Approving invoices
The approval of invoices is very crucial. Ideally, before payments are made, every invoice should go through rigid scrutiny to ensure that all invoices are valid and authorized. In fact, there are various points that need to be checked specifically, including:
- Pre-approval of the expense or the purchase order issued by the company
- The arrival of the goods purchased before the payment is to be made
- The singularity of the invoice
- Contracts and agreements with suppliers
5. Issuing of checks
After the steps are completed and the invoice’s been verified, the accountant creates the checks and specifies the amount to be paid on each check. They are sealed in envelopes, labeled with the appropriate addresses, and sent to the intended recipients.
The above steps are in a manual accounts payable system. Because it is very tedious and time-consuming, with a high probability of errors, an automated system is highly recommended.
Characteristics of a Well-run Accounts Payable System
An accurate accounts payable process results in accurate financial statements that ultimately lead to the success of a company. A well-run accounts payable system exhibits the following characteristics.
- Legitimate invoices are processed, not just accurately but timely as well.
- Invoices are recorded in the correct accounts.
- Unprocessed expenses are adjusted.
Thank you for reading CFI’s guide on How to Record Payments in Accounting. To keep advancing your career, the additional CFI resources below will be useful: