Accounts Payable Credit or Debit
Accounts payable is the amount owed by the company to its customer for purchasing goods or services, so it the liability of the company payable to the other party which is credited while passing the entry in the books of accounts of the company.
Account Payable is a liability account that measures the amount owed to the vendors or suppliers. If goods or services purchased by the company on credit, then the liability increases than means account payable increases or get the credit. If the firm pays back some amount of its account payable, then Account Payable gets reduced or gets debited.
The journal entries for accounts payable debit or credit is shown below –
Journal Entry for Accounts Payable Credit or Debit
If your company buys some assets from a vendor and promises to pay after one month that means Account Payable gets credited. Below will be a general entry for the same:
After one month you will pay back the amount to the vendors by cash. That means your liability will go down or will get debited. So below will be a general entry for Account Payable Debit:
Accounts Payable Credit or Debit Examples
Let’s see some examples to understand it better.
Example #1
Let’s say Company XYZ is buying inventory which is a current asset worth $500 from its vendor. It has promised to pay back the amount in one month. So, in this transaction Account Payable account gets credit and inventory account gets debit. Below is the journal entry for Account Payable Credit:
After one-month Company XYZ will pay back the amount with cash. That means cash amount will go down or get credited and on the other hand side Account Payable will get debited. Below will be accounting for the same:
Example #2 (IBM)
We will understand this concept from the year 2017 to 2018 for companies in the below practical example. IBM is an American Information technology multinational company which is headquartered in New York. Below is the Balance Sheet for IBM for the year 2018:
Source: www.ibm.com
As we can see that in 2017 Account Payable for IBM was $6,451 million while in 2018 it got increased to $6,558 million. Though we cannot say how many transactions happened that year but overall since it is increasing hence it is an example Account Payable Credit for IBM.
Account Payable Credit for Year 2018 = 6558-6451 = $107 Mn.
Example #3 (Walmart)
For the second example, we will take the example of another American multinational company, Walmart. Walmart is a US multinational retail organization headquartered in Arkansas. Let’s see its balance sheet below:
Source: s2.q4cdn.com
As we can see that in 2017 Account Payable for Walmart was $41,433 million while in 2018 it got increased to $46092 Mn. Though we cannot say how many transactions happened in that year but overall since it is increasing hence it is an example Account Payable Credit for Walmart
Account Payable Credit for the Year 2018 = 46092-41433 = $4,659 Mn.
Example #4 (Apple)
Let’s investigate Apple’s annual report to find out whether its Account Payable got credited or debited in the last 1 year. Apple is a US multinational company that designs and develops mobile and media devices and personal computers and sells many kinds of software. Below is the balance sheet snippet of Apple annual report for 2018:
Source: s22.q4cdn.com
As we can see that in 2017 Account Payable for Apple was $44,242 million while in 2018 it got increased to $55,888 Mn. As we can see that its business is growing and having a high account payable is in a way a good sign that the company is handling its cash policies in a good way. Since Account Payable is increasing that means it gets credit in 2018
Account Payable Credit for the Year 2018 = 55888- 44242 = $11,646 Mn.
Example #5 (Amazon)
For our next example, we will investigate the balance sheet of Amazon which is an American multinational company focusing on e-commerce, cloud computing, and artificial intelligence. Below is the balance sheet snippet of Amazon annual report for 2018:
Source: Amazon.com
As we can see that in 2017 Account Payable for Amazon was $34,616 million while in 2018 it got increased to $38,192 Mn. As we can see that its business is growing and having a high account payable is in a way a good sign that the company is handling its cash policies in a good way. Since Account Payable is increasing that means it gets credit in 2018
Account Payable Credit for Year 2018 = 38192-34616 = $3,576 Mn.
Conclusion
Account Payable is a very important concept for companies to keep looking at. In a standalone, if a business is healthy and its account payable is credit each year then it is a good sign because that means a company is paying its vendor and supplier late payment and that means its cash cycle is getting improved. But analyst needs to look into other aspects of business also, for example, whether a company is in distress state that’s why it is unable to pay back and that’s why its account payable is increasing. Hence account payable should be analyzed with other aspects of business also.
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