How to Record Accounts Payable Transactions - dummies

How to Record Accounts Payable Transactions

By Stephen L. Nelson

Within QuickBooks 2012, you have the option of either working with or without an accounts payable account. If you want to, you can record expenses when you write checks. This means that in order to have a complete list of all your expenses, you must have recorded checks that pay all your expenses. This approach works fine.

QuickBooks also supports a more precise approach of recording expenses. By answering a few questions during the QuickBooks setup process, you can set up an accounts payable account, which is just an account that tracks the amounts that you owe your vendors and other suppliers.

How to record a bill

When you use an accounts payable account, you enter the bills that you get from vendors when you receive them.

The following table shows the way this transaction is recorded. Journal Entry 5 automatically debits office supplies expense for $1,000 and credits accounts payable for $1,000. This is the journal entry that would be recorded by QuickBooks if you purchased $1,000 of office supplies and then entered that bill into the QuickBooks system.

Journal Entry 5: Recording a Credit Purchase
Account Debit Credit
Office supplies 1,000
Accounts payable 1,000

How to pay a bill

When you later pay that bill, QuickBooks records Journal Entry 6. In Journal Entry 6, QuickBooks debits accounts payable for $1,000 and credits cash for $1,000. The net effect on accounts payable combining both the purchase and the payment is zero.

That makes sense, right? The approach shown in Journal Entries 5 and 6 counts the amount that you owe some vendor or supplier as a liability, accounts payable, only while you owe the money.

Journal Entry 6: Recording the Payment to Vendor
Account Debit Credit
Accounts payable 1,000
Cash 1,000

When you record Journal Entry 6 in QuickBooks, you must supply the name of the account that gets debited. QuickBooks obviously knows which account to credit — the accounts payable account. However, QuickBooks also has to know the expense or asset account to debit.

QuickBooks does need to know which cash account to credit when you pay an accounts payable amount. You identify this when you write the check to pay the bill.

Some other accounts payable pointers

Here are a couple of additional points about Journal Entries 5 and 6:

  • The accounts payable method is more accurate. The accounts payable method, which is what Journal Entries 5 and 6 show, is the best way to record your bills. The accounts payable method means that you record expenses when the expenses actually occur.

    As you may have already figured out, the accounts payable method is really the mirror image of the accounts receivable approach. The big benefit of the accounts payable method, as you may intuit, is that it keeps track of the amounts that you owe vendors and suppliers and it recognizes expenses as they occur rather than when you pay them (which may be some time later).

  • Not every debit is for an expense. Journal Entry 5 shows the debit going to an office supplies expense account. Many of the accounts payable that you record are amounts owed for expenses.

    However, not every accounts payable transaction stems from incurring some expense. You may also need to record the purchase of an asset — such as a piece of equipment. In this case, the debit goes not to an expense account but to an asset account. Other than this minor change, however, the transaction works in the same way.

Can you guess how an expense or fixed asset purchase gets recorded if you don’t use an accounts payable account? In the case where you paid $1,000 for office supplies, QuickBooks debits office supplies expense for $1,000 and credits cash for $1,000 when you write a $1,000 check. As part of writing the check, you identify which expense account to debit.

If you’re purchasing a $1,000 piece of equipment, the journal entry looks and works in roughly the same way. When you record the purchase, QuickBooks debits the asset account for $1,000 and credits cash for $1,000. Again, this transaction gets recorded when you write the check to pay for the asset.