Accounts payable are debts that arise from purchases. In other words, when goods or services are purchased but not paid for immediately, they are recorded in the accounts payable section on the liabilities side of the balance sheet. When the buyer records an account payable, it also means that the seller records an account receivable. It’s important to remember that accounts payable are always based on an invoice received from an external party – no other types of debts should ever be recorded in this account.

How does a purchase go into accounts payable?

A purchase is recorded in accounts payable when it is not paid at the time of purchase but is instead invoiced. Purchases are recorded on the debit side, which means accounts payable increase on the credit side. Example: If a company purchases goods worth 5,000€ + 14% VAT on credit, the net amount is recorded as a debit in purchases, the VAT portion as a debit in VAT receivables, and the total amount as a credit in accounts payable.

How is a purchase removed from accounts payable?

When the purchase invoice is later paid, the payment is recorded as a debit in accounts payable and a credit in the bank account. At this point, the debit and credit entries in accounts payable cancel each other out, meaning the debt for that invoice is settled.

Accounts payable in the financial statements

 

Businesses that keep accounts on a cash basis must adjust them to an accrual basis for the financial statements—this is when accounts payable will definitely come into use. For companies that already use accrual-based accounting, accounts payable are recorded throughout the year.

A key point for accounts payable in financial statements is that a liability arises when a product or service has been delivered. For example, if the financial year ends on December 31 and goods are received on that date, but the invoice arrives in January, the expense must still be allocated to December. However, whether the VAT is also recorded in December depends on the invoice date:

• If the invoice is dated in December, the full amount (including VAT) is recorded in December.

• If the invoice is dated in January, only the net amount is recorded in December and the VAT is handled in January.

It’s also important to understand the difference between accounts payable and accrued liabilities. Accounts payable should never include estimated liabilities—only debts for which an actual invoice has been received from an external party. Estimated liabilities include, for example, taxes, interest, and holiday pay, which in the financial statements belong under accrued liabilities.

In short: Accounts payable are simply unpaid invoices. It’s a good idea to keep track of them monthly to know how many purchases remain unpaid at the end of each month. If you use an electronic purchase ledger, paying invoices and keeping track of due dates becomes much easier!