ACCOUNTS PAYABLE: Recording Purchases, Discounts, Cutoff
- Graziano Stefanelli
- 12 hours ago
- 2 min read
Accounts payable represent amounts owed to suppliers for goods and services received on credit.
Payables are recognized when the obligation arises, and must reflect accurate timing, discount treatment, and liability presentation.
1. What Are Accounts Payable?
Accounts payable (AP) are short-term obligations arising from credit purchases of inventory, services, or supplies.
They are recorded when goods or services are received, not when payment is made.
AP is a current liability unless contract terms specify otherwise.
2. Recording Purchases on Credit
When a company receives goods or services with deferred payment terms:
debit Inventory (or relevant expense account)
credit Accounts Payable
Example:
On March 5, a company receives raw materials worth $12,000 on 30-day terms:
debit Inventory ..................................................... 12,000
credit Accounts Payable .................................... 12,000
3. Payment of Accounts Payable
When the liability is settled:
debit Accounts Payable
credit Cash (or Bank)
Example:
On April 4, the company pays the supplier in full:
debit Accounts Payable .................................... 12,000
credit Cash ............................................................ 12,000
4. Purchase Discounts
Suppliers often offer early payment discounts, such as “2/10, net 30” (2% discount if paid within 10 days).
Two accounting methods:
Method | When to record the discount |
Gross method | Recognize discount only if taken |
Net method | Assume discount will be taken, reverse if missed |
Gross method — discount taken:
debit Accounts Payable .................................... 12,000
credit Cash ............................................................ 11,760
credit Purchase Discounts Earned .................... 240
5. Cutoff and Accrual Accuracy
AP must reflect only goods or services received by the end of the period.
Typical errors:
Recording an invoice dated in December for goods received in January
Omitting liabilities for services performed but not yet invoiced
Audit implication: Incorrect AP can understate both liabilities and expenses.
6. Statement Reconciliation and Controls
Companies must regularly reconcile AP balances with vendor statements to detect:
Missing invoices
Duplicate entries
Unrecorded credits or disputes
Best practices include:
3-way match: PO, invoice, receiving report
Approval workflows
Aging analysis to monitor overdue payments
7. Financial Statement Impact
Balance sheet: AP is part of current liabilities.
Cash flow statement: AP changes affect cash from operations (indirect method).
Working capital: Impacts liquidity ratios and short-term solvency.
Key take-aways
Accounts payable is recorded when goods or services are received, not when paid.
Discounts must be treated consistently using gross or net method.
Accurate cutoff procedures ensure expenses and liabilities are not misstated.
Proper reconciliation and controls safeguard against errors and fraud.
