Some definitions are a useful introduction to aid understanding
Trade payables (often simply referred to as 'payables') are liabilities outstanding relating to the purchase of goods and services used by a business in the normal course of its activities. This may include raw materials and components for a manufacturing business, or finished goods ready for sale for a trading business.
Other payables are amounts outstanding which do not relate directly to trade payables. Examples include:
In addition, remember that the ACCA FA1 syllabus and exam assumes that computerised accounting systems are used. This means that when, for example, a credit purchase is recorded in the accounting system, it automatically updates the general ledger accounts along with updating the memorandum payables' ledger accounts.
FA1: RECORDING FINANCIAL TRANSACTIONS
The accounting entries required to record a credit purchase are:
Debit
Purchases or other expense or asset account (to record the net expense or asset cost due to the supplier)
Debit
Sales tax on inputs (if relevant)
Credit
Payables (to record the gross liability due to the supplier)
If all proceeds as expected, the subsequent payment will be accounted for as follows:
Debit
Payables (to clear the amount which is no longer to the supplier)
Credit
Cash at bank (to record the payment to the supplier)
If all processed as expected, the subsequent payment will be accounted for as follows:
Debit
Payables (to clear the amount which is no longer to the supplier)
Credit
Cash at bank (to record the payment to the supplier)
If the business decides to take advantage of the settlement terms offered by the supplier, the total liability due to the supplier must be removed from the general ledger, and this is matched by a reduced cash payment plus recording of discount received, a form of income.
The above accounting entries will be modified to record discount received as follows
Debit
Payables (to clear the amount which is no longer to the supplier)
Credit
Cash at bank (to record the payment of a reduced amount to the to the supplier)
Credit
Discount received (to record the settlement discount received - a form of income)
If goods are returned to the supplier, perhaps because they were faulty or the wrong items were delivered and invoiced, a this also needs to be recorded in the general ledger. The accounting entries required to record goods supplied by a credit supplier are:
Debit
Payables (to record the reduction in liability)
Credit
Purchases (or Returns Outwards) (to record the reduction in expense or asset cost)
Remember that, as general ledger accounts are updated, the memorandum only payables' ledger accounts will be updated simultaneously. Therefore, the total of the payables' ledger balances will agree with the balance on the payables general ledger account
There are other transactions relating to payables that will be recorded in the general ledger over a period of time.
Trade payables
The payables' general ledger account may include any of the following entries:
| $ | $ | ||
|---|---|---|---|
| Cash at bank | X | Balance b/f | X |
| Purchases returns | X | Credit purchases | X |
| Early settlement discounts | X | Interest on overdue | X |
| received | accounts (1) | ||
| Contra with receivables | X | ledger (2) | |
| Balance c/f | X | X | |
| X | X | ||
| Balance b/f (3) | X |
The numbered items above can be clarified as follows:
Suppliers may charge their customers interest on overdue amounts, If so, this will increase the amount owing to that supplier and also increase interest payable in the statement of profit and loss.
One business may both sell to, and buy from, another on credit terms. If that is the case, each business will have both amounts owing both to and from each other. Rather than make payments in full to each other, the two businesses may agree to offset (or 'contra') an agreed amount against the balances due to each other.
The following accounting entries will have the effect of reducing both the receivables and payables' general ledger accounts in each business:
Debit:
Payables $X
Credit:
Receivables $X
The closing balance at the end of an accounting period is the balance which will be included in the statement of financial position compiled at that date. The balance will be classified as a current liability.
FA1: RECORDING FINANCIAL TRANSACTIONS
Remember that, as the general ledger accounts are updated, the memorandum-only individual payables ledger accounts will also be updated at the same time using the same information. Therefore, there will be no differences between the payables general ledger account and the total of the memorandum individual payables' ledger accounts.