How to Record Payment in Accounting?
Recording payment 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 on 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 receives an invoice of $500 should put the amount on record and pay it on or before the due date to avoid a default.
Accounts Payable vs. Accounts Receivable
The two concepts of accounts payable and accounts receivable are definitely different from each other. Accounts payable, on the one hand, refers to how much a company owes another company for purchasing goods and services that need to be paid off. One key word here is “credit,” which means that the goods were acquired first, and the payment follows.
Accounts receivable, on the other hand, is the opposite, as it is the amount of money that a company can collect from another company for having sold its goods or services to them. Therefore, we can say that the first one is a liability while the other one is an asset.
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. Now, Bags Unlimited sends its invoice and writes the due date December 15, as agreed by both parties. It records the transaction under its accounts receivable while Company B records it under accounts payable.
Is Accounts Payable a Debit or a Credit?
This is one of the tricky questions about accounts payable. Accounts payable are considered debts because they involve the purchase of goods on credit, which means that it should keep a credit balance. Credit balance 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.
After the invoice is paid, the amount is recorded as debit; thus, lowering the credit balance again. In summary, the higher the accounts payable, the higher its credit balance is, and the lower the accounts payable, the lower is 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 longstanding 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 by 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 of 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, 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 entries are accurate. 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.
We hope you’ve enjoyed reading CFI’s guide to how to record payment in accounting. CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ 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: