Whenever a trade happens on an invoice, an account payable and an account receivable account is opened. And recording payments is essential for the company records and financial statements.
Now, being said that, it could overwhelm you if you are a new beginner and do not know how to record invoices in accounting. Therefore, we have come up with a blog to show you the examples and discuss the characteristics of an accounts payable system.
So, without any further ado, let’s dive right in.
Table of Content
- Accounts Payable vs. Accounts Receivable
- Record Invoices in Accounting Example
- The Account Payable Process
- Characteristics of a Well-run Accounts Payable System
To understand invoice recording, we need to understand the basic difference between accounts payable and accounts receivable.
So, let’s differentiate the two.
Accounts Payable vs. Accounts Receivable
Accounts payable is nothing but the amount of money you owe to vendors for purchasing their goods or services. In other words, the amount you received the vendor invoice for is known as the accounts payable. Accounts payable comes under the business liabilities as it adds to the credit balance sheet of your company.
And to the contrary, accounts receivable is the amount of money your customers owe you for purchasing your goods or services. This is the amount you send an invoice for. Accounts receivable comes under the current assets of your company as it is the money you will receive in near future.
Therefore, every purchase made in credit creates both accounts payable and accounts receivable for the customer and the vendor respectively. This means an account payable for one company is another company’s account receivable.
Did we lose you?
Let’s understand it with an example.
A restaurant buys food supplies worth $100 from a vendor on credit.
This creates accounts payable of $100 for the restaurant and accounts receivable of $100 for the vendor. As simple as that.
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Record Invoices in Accounting Example
As every business deals with distinct situations, every business needs a distinct set of journal entries. Therefore, every business has a customized invoice recording process designed specifically to record transactions in the way the business needs.
However, we can consider a few types of journal entries to be generic. In most cases, these are enough for a small business in an early stage.
So, let’s have a quick look at a few of the examples of journal entries.
Example Revenue Journal Entries
- Sales recording: If the products or services are sold on credit (accrual accounting practice), it is debited to accounts receivable and credited to sales. Whereas, if the sale was for cash, then instead of the accounts receivable, the cash is debited.
- Allowance for doubtful accounts recording: While setting up or adjusting a bad debt reserve the bad debt expense account is debited and the allowance for doubtful accounts is credited. And when the specific debts are determined, debit allowance for doubtful accounts and credit to accounts receivable.
Example Expense Journal Entries
- Accounts payable recording: While entering an account payable, the asset or expense which relates to the purchase is debited and the accounts payable is credited. Whereas, if an account payable is paid, it is debited and the cash is credited.
- Payroll recording: When recording payroll expenses, the debit entry is made in the wages expense and payroll tax charges/expense, and the credit entry is made in the cash account. If an employee has permitted a deduction for benefits from their pay/salary, additional credits for deductions must be made from benefit expense accounts.
- Petty cash recording: If petty cash is being restored, the debit entry is made in expenses to be charged (as mentioned on the received vouchers) and the credit entry is made in the cash for the amount of cash being used for restoring the petty cash box.
- Depreciation recording: When recording depreciation expense, the debit is made in the depreciation expense, and the credit entry is made in the accumulated depreciation. Both these accounts may be further categorized by the type of fixed assets being accounted for.
- Accrued expense recording: When accruing an incurred expense, the debit entry is made in the applicable expense and the credit entry is made in the accrued expenses. And this entry is generally reversed automatically afterward.
Example Asset Journal Entries
- Cash reconciliation recording: There are many approaches to record this entry. Generally, the debit entry is in the bank fees to recognize the charges made by the bank and the credit entry is in the cash.
- Obsolete inventory recording: When forming a reserve for obsolete inventory, the debit entry is made in the cost of products/services sold, and the credit entry is made in the reserve for obsolete entry. When this inventory is being disposed of the debit entry is in the reserve and the credit entry is in the inventory.
- Fixed asset addition recording: When a fixed or plant asset is to be added to the accounting records, the debit entry is made in the applicable fixed asset account and the credit entry is made in the accounts payable.
- Fixed asset derecognition recording: While removing a fixed asset from accounting records, the debit entry is made in the accumulated depreciation and the credit entry is made in the applicable fixed asset account. Some gain or loss may also be seen on the derecognition.
- Prepaid expense adjustment recording: To recognize prepaid expenses as expenses, the debit entry is recorded in the applicable expense accounts and the credit entry is recorded in the prepaid expense account.
Example Liability Journal Entries
- Loan recording: When recording liabilities, such as availing a loan, the debit entry is made in the bank account and the credit entry is made in the loan account.
Liability entries are much similar to the accounts payable and accrued expenses accounts entries.
Example Equity Journal Entries
- Stock repurchase recording: When shares are repurchased, the debit entry is made in the treasury stock and the credit entry is made in the cash. Alternative methods for recording treasury stocks are also available.
- Dividend declaration recording: When recognizing a liability to pay dividends the debit entry is made in the retained earnings account and the credit entry is made in the dividends payable accounts. After the dividends are paid, the debit entry is made in the dividends payable account and the credit entry is made in the cash account.
The Account Payable Process
The accounts payable process covers everything right from receiving the vendor invoices to paying the invoices.
The account payable process includes receiving invoices, verifying invoices, recording invoices, and paying the accounts payable. The efficiency of this process defines your cash flow and your relation with the vendors.
To avoid any late payments or fraudulent payments, you should follow a few accounts payable process steps, which are:
- Create Your Graph of Accounts
- Set Up Vendor Information
- Evaluate and Enter Bill Information
- Process and Review Payment for Any Invoices Due
- Repetition of The Process Weekly
Characteristics of a Well-run Accounts Payable System
An accounts payable system is so vital for a company that it can make or break the business. Thus, it is essential to keep checking if the accounts payable system is well-run or not. And that can be confirmed by looking for the characteristics of the system.
So, let’s talk about a few characteristics of accounts payable which will help make your business successful.
- It helps you process unpaid invoices accurately and quickly.
- It registers invoices in the appropriate accounts.
- It helps you adjust the unprocessed expenses.
What is the journal entry for invoice processing?
As every journal entry consists of one credit and debit, a journal entry for invoice processing would be initially debit from the accounts receivable and credit to the revenues. Furthermore, you need to mention the customer’s name, line item, invoice date, invoice number, and due date.
How do you account for accounts payable?
The accounts payable is an expense or payments to be paid. Therefore, to make the journal entry, you need to debit the expense or asset of the related purchase and credit the accounts payable account. Once the accounts payable process is complete, a debit entry is made to the accounts payable and a credit entry is made to cash.
What are some examples of accounts payable?
Accounts payable counts for all the outstanding balances of the company. For example, when an automotive manufacturer company owes a short-term debt to the steel manufacturing company for the steel purchased, the debt is an example of accounts payable for the automotive manufacturing company.
Is Accounts Payable an asset?
No, the accounts payable is not referred to as an asset, it is counted as the current liability instead. As the accounts payable is the amount to be paid in the near future, it is a liability of the company.
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Recording an invoice is an attention-demanding process and must be left to a professional with experience. And even with the perfect general ledger recording process, it has plenty of room for human errors. And if you are running a business where multiple transactions are happening simultaneously, these errors can cost you a fortune.
Therefore, using accounting software is a smart move. InvoiceOwl is one of the most popular invoicing and accounting software that helps you keep track of all the sales revenue, record payments, and accounts receivable assets.
We hope this blog has helped you with journal entry examples for maintaining the general ledger right from the opening to closing of the accounts payable account and the accounts receivable account.