How to Record Invoice in Accounting? (Examples & Characteristics)

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In accounting, payments made to contractors for their services are referred to as accounts payable. Understanding journal entries for accounts payable will help you keep accurate financial records for your organization.

While keeping a tidy financial record can be quite overwhelming for the beginner who may not know how to record invoices in accounting, here are a few tips on journal entries for accounts payable as well as other tips on how to compose a journal entry for accounts payable.

📝Key Takeaways:

  • Learn ways to record invoices in accounting.
  • Learn the benefits of a functional accounts payable system.

Accounts Payable vs. Accounts Receivable

invoicing in accounting: Accounts Payable vs. Accounts Receivable

To get a better understanding of how an invoice is inputted as a journal entry, let’s discuss the basic differences between accounts payable and accounts receivable.

Accounts payable (commonly referred to as AP) is basically the money an organization owes third-party suppliers or creditors. Accounts receivable (also commonly referred to as AR) are outstanding invoices of payments due to you by customers for the purchase of goods or services. Therefore, every transaction creates both accounts payable and accounts receivable for the customer and the vendor, respectively.

In accounting, accounts payable is considered a current liability as it denotes money owed. On the other hand, an account receivable is deemed a current asset because it signifies expected payments, usually within a one-year period.

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Commons Ways Financial Transactions Are Recorded in Accounting

Most businesses engage in multiple transactions and need a distinct set of journal entries. Therefore, businesses customize their invoice recording process to their business needs. Since journal entries are critical to the accounting process, here are a few ways most businesses record their financial transactions.

  1. Revenue Journal Entry

    For many businesses, their revenue journal entry can be split into two main categories: sales accounts and allowance for doubtful accounts.

    • Sales accounts: When businesses make a sale, the corresponding journal entry credits the sales account and debits the accounts receivable.
    • Allowance for doubtful accounts: In business, there are times when customers are unable to pay for sales made on credit. In these situations, a slight adjustment is made to debit the bad debt expense account to credit the allowance for doubtful accounts.When the customer makes the payments later in the future, the entry can be reversed by debiting the accounts receivable and crediting the bad debt expense. You can then issue a receipt to the customer by debiting the cash account and crediting the accounts receivable.
  2. Expense Journal Entries

    • Accounts payable journal entry: This refers to the amount payable in journal entries for an expense on credit for goods or services. This account is debited when payments are made.
    • Payroll journal entry: A payroll journal entry is a recording of the compensation or wages due to employees or contractors. Although it’s a bit more complicated due to taxes, you will still debit the expense account and credit the cash account.
    • Petty cash journal entry: A petty cash journal entry creates a debit to the petty cash account and a credit to the regular cash account.
    • Depreciation recording: A journal entry for depreciation is issued by debiting the depreciation expense account and crediting the accumulated depreciation account.
    • Accrued expense recording: Accrued expenses or liabilities are unpaid expenses during an accounting period. The relevant expenditure account is debited, and accrued expense account is credited.
  3. Asset Journal Entries

    • Cash reconciliation journal entry: Banks typically accumulate charges they’ve not reconciled. For cash reconciliation journal entries, simply debit accounts such as Bank Service Charges and credit Cash. For a journal entry when a customer’s check could not be processed due to insufficient funds, debit accounts receivable and credit Cash.
    • Disposal of assets journal entry: WWhen an asset is fully depreciated, its accumulated depreciation account will be debited as a single entry in the general journal, and the relevant asset account is credited. This may result in a loss or gain in some instances.
    • Fixed asset journal entry: When buying a fixed asset on credit, the applicable asset account will be debited, and the account payable will be credited. Fixed assets bought in installments usually include the interest rate.
    • Prepaid expense adjustment journal entry: Prepaid expenses are regarded as assets since they offer future economic benefits to an organization. In this case, the appropriate debit account is debited, and a credit to cash or the relevant expense account is made.
  4. Liability Journal Entries

    For owed expenses, the applicable expense account would be debited while the cash or accrued liability account will be credited.

  5. Equity Journal Entries

    • Stock repurchase journal entry: When Companies can record a journal entry for the repurchase of their stock by debiting the treasury stock account and crediting the cash account.
    • Dividend journal entry: 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

invoicing in accounting: Account payable process

The accounts payable process in an organization is the management of its short-term payment obligations and covers everything from paying vendors and suppliers for goods and services purchased to managing and verifying incoming bills and invoices.

For most organizations, the accounts payable process steps can be split into four steps:

  • Receiving the invoice
  • Reviewing the invoice
  • Approving the invoice
  • Paying suppliers or vendors

Features of a Functional Accounts Payable System

Having an accurate account payable is not only essential to producing an accurate balance sheet, but it also indicates whether you are overspending or relying too much on credit. Also, a decrease in accounts payable indicates negative cash flow, which can help you detect an inventory that could be tying up cash in your bank account.

Regardless of the company’s size, the accounts payable would only pay invoices and bills that are accurate and legitimate. So before an invoice is entered into your accounting records, the invoice must clearly itemize what was ordered, what was received as well as the unit and total costs. Most organizations employ safeguards like using invoicing software to ensure all vendor invoices are accounted for and to prevent:

  • paying a fraudulent invoice.
  • paying an invoice twice.
  • paying an inaccurate invoice.

Here are a few features of a functional accounts payable process:

  • Invoice handling capabilities
  • Structured approval workflow
  • Functional reporting system
  • Records management

How to Improve Your Accounts Payable Process

Without optimizing your accounts payable system, you end up stalling the growth of your business. Here are some of the best practices for AP departments globally.

  • Map out your accounts payable process: Create an accurate plan of your current account payable process to help quickly identify inefficiencies and bottlenecks.
  • Simplify workflow: Identify redundancies and adopt a more streamlined approach with clearly defined processes.
  • Avoid paper invoices: Asides from the cost of printing numerous invoices, it takes a bit of time to manually transfer invoices to the appropriate department for verification and authorization. Hinting your suppliers or vendors about switching to an app like InvoiceOwl to send electronic invoices would ensure you don’t lose track of them and avoid late payments.
Frequently Asked Questions
    1. What is the journal entry for an invoice?Invoices sent to customers are recorded as journal entries in the accounting journal. The journal entry is recorded by entering the total amount due from the invoice as a debit on accounts receivable and a credit on the sales account.

    1. 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.

    1. How do you account for accounts payable?An accountant credit accounts payable when they receive a bill or invoice. If there is any debit offset for this journal entry, it goes into an expense account for the goods or services purchased on credit.

    1. What are some examples of accounts payable?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.

  1. Is accounts payable an asset?No, the accounts payable is considered a current liability on the balance sheet as it constitutes payments owed to vendors or suppliers.

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Conclusion

Recording an invoice is an attention-demanding process which is why most growing organizations hire an accountant, and even with the perfect general ledger recording process, there could be lots of errors. When running a business where multiple transactions are happening simultaneously, these errors can cost you a fortune which is why many organizations use accounting software that can be tailored to their operations.

InvoiceOwl helps small businesses manage their income and streamline their bookkeeping process. Create multiple types of invoices online and manage your clients effortlessly. With the power of cloud computing, bookkeeping has never been easier.

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Author Bio
Jeel Patel
Jeel Patel
Founder

Jeel Patel is the Founder of InvoiceOwl and is the main curator & writer of the content found on this site. With ideals of quality, commitment, and perseverance, he believes in creating lasting business relationships with the clients.

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