The general ledger account Accounts Payable or Trade Payables is a current liability account, since the amounts owed are usually due in 10 days, 30 days, 60 days, etc. The balance in Accounts Payable is usually presented as the first or second item in the current liability section of the balance sheet. (Many companies report Notes Payable due within one year as the first item.)
As a liability account, Accounts Payable is expected to have a credit balance. Hence, a credit entry will increase the balance in Accounts Payable and a debit entry will decrease the balance.
A bill or invoice from a supplier of goods or services on credit is often referred to as a vendor invoice. The vendor invoices are entered as credits in the Accounts Payable account, thereby increasing the credit balance in Accounts Payable. When a company pays a vendor, it will reduce Accounts Payable with a debit amount. As a result, the normal credit balance in Accounts Payable is the amount of vendor invoices that have been recorded but have not yet been paid. The unpaid invoices are sometimes referred to as open invoices.
Accounting software allows companies to sort its accounts payable according to the dates when payments will be due. This feature and the resulting report are known as the aging of accounts payable.
Entering a vendor invoice into Accounts Payable
Prior to entering a vendor invoice into Accounts Payable, the invoice should be reviewed and approved. The reason is that a vendor invoice may contain errors (incorrect quantities, incorrect prices, math errors, etc.) and some invoices may not be legitimate.
After a vendor invoice has been approved, the recording of the invoice will include:
- a credit to Accounts Payable, and
- a minimum of one debit to another account. The debit amount usually involves one of the following:
- an expense (Repairs & Maintenance Expense, Advertising Expense, Rent Expense, etc.)
- a prepaid asset (Prepaid Expenses, Prepaid Insurance)
- a fixed or plant asset (Equipment, Fixtures, Vehicles, etc.)
A listing of the accounts that a company has available for recording transactions is known as the chart of accounts.
A report that lists the accounts and amounts that are debited for a group of invoices entered into the accounting software is known as the accounts payable distribution.
Reductions to Accounts Payable
When a company pays part or all of a previously recorded vendor invoice, the balance in Accounts Payable will be reduced with a debit entry and Cash will be reduced with a credit entry.
Accounts Payable is also debited when a company returns goods to a vendor or when the vendor grants an allowance.
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What is the General Journal?
The general journal is part of the accounting record keeping system. When an event occurs that must be recorded, it is called a transaction, and may be recorded in a specialty journal or in the general journal. There are four specialty journals, which are so named because specific types of routine transactions are recorded in them. These journals are the sales journal, cash receipts journal, purchases journal, and cash disbursements journal. There could be more specialty journals, but the four accounting areas represented by these journals contain the bulk of all accounting transactions, so there is usually no need for additional journals. Instead, by default, all remaining transactions are recorded in the general journal. Once entered, the general journal provides a chronological record of all non-specialized entries that would otherwise have been recorded in one of the specialty journals.
Examples of General Journal Entries
Examples of transactions recorded in the general journal are asset sales, depreciation, interest income and interest expense, and stock sales.
Journal Entry Format
Transactions are recorded in all of the various journals in a debit and credit format, and are recorded in order by date, with the earliest entries being recorded first. These entries are called journal entries (since they are entries into journals). Each journal entry includes the date, the amount of the debit and credit, the titles of the accounts being debited and credited (with the title of the credited account being indented), and also a short narration of why the journal entry is being recorded.
Example of a General Journal Accounting Entry
An example of a journal entry that would be recorded in the general journal is:
Journal Process Flow
After the transactions are recorded in these journals, a summary of all the transactions is posted in each journal to the general ledger, which contains all of a company's accounts. An account is a separate, detailed record associated with a specific asset, liability, equity, revenue, or expense item. Examples of accounts are:
Accounts Receivable (an asset account)
Accounts Payable (a liability account)
Retained Earnings (an equity account)
Product Sales (a revenue account)
Cost of Goods Sold (an expense account)
In summary, an accounting transaction is recorded into a journal, and then the information in the journal is posted into the accounts which are stored in the general ledger. The general journal is the repository for transactions that are not recorded in a specialty journal. Thus, the general journal can be considered an intermediate repository of information for some types of information, on the way to its final recordation in the general ledger.
Other General Journal Issues
The general journal was more visible in the days of manual record keeping. With nearly everyone now using accounting software to record their accounting transactions, it is not so readily apparent. Instead, the software makes it appear as though all transactions center around the general ledger, with no specialty journals in use at all.