Want to know About accounts payable process and all journal entries and their effects in balance sheet

Accounts payable is a Balance sheet item on the liability side, which signifies the the amount of payment the business is yet to pay to the creditors. Accounts payable process starts with the company purchasing goods/services on credit from the seller. The credit period (For e.g 30 days) is predefined and varies as per the industry. Lets understand with an e.g. Co. Rantan & Co. purchased goods from Soham & Co. worth Rs. 20 Lakh on 1st Mar'14. The credit period is 45 days. Hence, Ratan & Co. have to make the payment by 15th April. At the end of Q1'14 Ratan & Co. will show accounts payable of 20 Lakh in the Balance sheet and Soham & Co. will show account receivable of 20 Lakh read less

Accounting, simply defined, is the method in which financial information is gathered, processed and summarized into financial statements and reports. An accounting system can be represented by the following graphic, which is explained below. 1.Every accounting entry is based on a business transaction, which is usually evidenced by a business document, such as a check or a sales invoice. 2.A journal is a place to record the transactions of a business. The typical journals used to record the chronological, day-to-day transactions are sales and cash receipts journals and a cash disbursements journal. A general journal is used to record special entries at the end of an accounting period. 3.While a journal records transactions as they happen, a ledger groups transactions according to their type, based on the accounts they affect. The general ledger functions as a collection of all balance sheet, income and expense accounts used to keep a business's accounting records. At the end of an accounting period, all journal entries are summarized and transferred to the general ledger accounts. This procedure is called "posting." 4.A trial balance is prepared at the end of an accounting period by adding up all the account balances in your general ledger. The sum of the debit balances should equal the sum of the credit balances. If total debits don't equal total credits, you must track down the errors. 5.Finally, financial statements are prepared from the information in your trial balance. Your accounting records are vitally important because the resulting financial statements and reports help you plan and make decisions. These statements and reports may be used by some third parties like bankers, investors or creditors, and are needed to provide information to government agencies, such as the IRS. read less

The accounts payable process or function is immensely important since it involves nearly all of a company's payments outside of payroll. The accounts payable process might be carried out by an accounts payable department in a large corporation, by a small staff in a medium-sized company, or by a bookkeeper or perhaps the owner in a small business. Regardless of the company's size, the mission of accounts payable is to pay only the company's bills and invoices that are legitimate and accurate. This means that before a vendor's invoice is entered into the accounting records and scheduled for payment, the invoice must reflect: what the company had ordered what the company has received the proper unit costs, calculations, totals, terms, etc. To safeguard a company's cash and other assets, the accounts payable process should have internal controls. A few reasons for internal controls are to: prevent paying a fraudulent invoice prevent paying an inaccurate invoice prevent paying a vendor invoice twice be certain that all vendor invoices are accounted for Periodically companies should seek professional assistance to improve its internal controls. The accounts payable process must also be efficient and accurate in order for the company's financial statements to be accurate and complete. Because of double-entry accounting an omission of a vendor invoice will actually cause two accounts to report incorrect amounts. For example, if a repair expense is not recorded in a timely manner: the liability will be omitted from the balance sheet, and the repair expense will be omitted from the income statement. If the vendor invoice for a repair is recorded twice, there will be two problems as well: the liabilities will be overstated, and repairs expense will be overstated. In other words, without the accounts payable process being up-to-date and well run, the company's management and other users of the financial statements will be receiving inaccurate feedback on the company's performance and financial position. A poorly run accounts payable process can also mean missing a discount for paying some bills early. If vendor invoices are not paid when they become due, supplier relationships could be strained. This may lead to some vendors demanding cash on delivery. If that were to occur it could have extreme consequences for a cash-strapped company. Just as delays in paying bills can cause problems, so could paying bills too soon. If vendor invoices are paid earlier than necessary, there may not be cash available to pay some other bills by their due dates. read less