Accounts Payable
Module 3:
Cash, Receivables, Payables
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Define Accounts Payable
➛ Identify transactions that create accounts payable
➛ Record accounts payable transactions correctly
➛ Distinguish between Accounts Payable and Notes Payable
➛ Understand how Accounts Payable appears in financial statements
➛ Explain the importance of managing payables
Key Vocabulary
➛ Accounts Payable
➛ Creditor
➛ Trade Payables
➛ Credit Purchase
➛ Current Liability
➛ Invoice
➛ Due Date
What Is Accounts Payable?
Accounts Payable represents short-term debts owed to suppliers for purchases made on credit.
Examples
➛ Buying inventory on credit
➛ Receiving utility services before paying
➛ Purchasing office supplies on account
Key Characteristics of Accounts Payable
➛ It is a current liability
➛ Usually settled within 30-90 days
➛ No interest is charged | unlike notes payable
➛ Created by credit purchases
➛ Recorded from supplier invoices
Accounts Payable vs Notes Payable
Accounts Payable
Short-term
No interest
Informal
Based on invoices
Short-term
No interest
Informal
Based on invoices
Notes Payable
Can be short or long-term
Interest is charged
Formal written agreement
Based on promissory notes
Can be short or long-term
Interest is charged
Formal written agreement
Based on promissory notes
Journal Entry for Accounts Payable
Example
Bought goods worth $2,000 on credit.
Inventory / Expense
Accounts Payable
Accounts Payable
Dr 2,000
Cr 2,000
Cr 2,000
When payment is made
Accounts Payable
Cash
Cash
Dr 2,000
Cr 2,000
Cr 2,000
Financial Statement Presentation
Balance Sheet
Accounts Payable ➧ Current Liabilities section
Income Statement
No direct appearance | only related expenses appear
Identify Accounts Payable Transactions
State whether Accounts Payable is increased, decreased, or not affected
➛ Bought inventory on credit
➛ Paid supplier in cash
➛ Purchased equipment using a bank loan
➛ Paid electricity bill
➛ Received goods with invoice due in 30 days
Debit or Credit?
Indicate whether Accounts Payable is debited or credited
➛ Buying supplies on credit
➛ Paying a supplier
➛ Returning goods to a supplier
➛ Recording a supplier invoice
Journal Entry Practice
Prepare journal entries for
➛ Purchased office supplies worth $600 on credit
➛ Paid $400 to a supplier
➛ Bought inventory $1,200, half cash and half on credit
Classification
Classify each as Accounts Payable, Notes Payable, or Not a Liability
➛ Supplier invoice
➛ Bank loan agreement
➛ Salaries owed to employees
➛ Owner investment
➛ Utility bill unpaid
Mini Case Study
A stationery shop buys goods worth $8,000 from a supplier on credit. The supplier allows payment within 60 days.
Questions
➛ What account is created by this transaction?
➛ Is it a current or non-current liability?
➛ What journal entry is recorded at purchase?
➛ What happens to Accounts Payable when payment is made?
➛ Where does this appear in the financial statements?
Quick Quiz
➛ What is Accounts Payable?
➛ Is Accounts Payable an asset or a liability?
➛ True or False | Accounts Payable usually earns interest.
➛ Which document creates Accounts Payable?
➛ Where does Accounts Payable appear in the balance sheet?
Answers ➧ Here
Notes Payable ➧ Here