One task that tends to cause confusion for many bookkeepers and small business owners is the proper handling of the Accounts Payable liability account. These are debts that your business owes to creditors for goods purchased or services rendered. It is important to understand that when a bill is received from a creditor, and the business owner plans to promptly pay this bill, no entry is necessary for Accounts Payable purposes. The payment is simply recorded in the register from which the funds will be paid, with the appropriate expense account is selected (i.e., electricity, office supplies, etc.) Eliminating the setup of Accounts Payable in this particular situation will alleviate the extra time needed to enter the bill as a payable and then pay the bill as a separate transaction.
However, if the business receives a bill, and it is determined that the business owner will wait a period of time to pay this balance, this is the appropriate scenario for entering the bill into Accounts Payable. By doing this, the business owner can track the outstanding debts of the business at any particular time of the year at a glance. In addition, at the end of the tax year, by entering these payables in this manner, the expenses incurred for the current tax year will be used to offset the current income received (if the business is using an accrual basis, not a cash basis accounting system).
One last step, however, needs to be made here when using your Accounts Payable liability account, and this is the step most business owners tend to forget. If a bill has been entered using the Accounts Payable account, then when the bill is paid, it is essential to debit the Accounts Payable account, instead of the expense account for which the bill is being paid. Otherwise, the Accounts Payable balance will be overstated.
By properly handling the Accounts Payable liability account, the business owner and their accountant/tax preparer will always have an accurate record of the outstanding bills for the business.
With offices in Williston and Rutland, Vermont, Davis & Hodgdon has been assisting small business owners with bookkeeping and financial reporting organization for more then 25 years. For more information please call 802.878.1963 (Williston) or 802.775.7132 (Rutland) or email [email protected].
Article by Martha Leonard, Bookkeeper and Tax Preparer, Davis & Hodgdon Associates CPAs