Accounts Payable Ledger Definition
Accounts Payable Ledger, also known as the creditor’s ledger, is the subsidiary ledger which lists down the details of the different suppliers or vendors of the company along with their account balances highlighting the outstanding amount payable by the company.
It tracks specific payable information for every invoice, including:
- Invoice Date
- Invoice Number
- Name of Supplier/Vendor
- Order Quantity
- Amount Payable
The general ledger account balance for accounts payableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period. is compared to the ending accounts payable ledger balance for ensuring that both accounts are matching. Such a comparison is made as part of the period-end (quarterly/yearly) closure process.
Example of Accounts Payable Ledger
Let us analyze the below example for more understanding:
The purchase transactions for Titan Sports Gear Company are:
- March 12: Purchased $20,000 of merchandise inventory, with terms of 2/15 n 45, FOBFOBFOB is an abbreviation for Freight On Board. It is also referred to as free on board. FOB is a legal term that refers to the point at which the risk and cost of the goods being shipped are transferred from the selling party to the buying party. destination from Mighty Sun Suppliers
- March 18: Returned merchandise worth $3,000, which was damaged during the March 12 shipments.
- March 27: Paid for the merchandise of the March 18 purchase from Mighty Sun Suppliers less the return and discount.
The accounting transactions were recorded under the perpetual inventory method in the following accounts payable journals entriesAccounts Payable Journals EntriesAccounts Payable Journal Entries refers to the amount payable accounting entries to the creditors of the company for the purchase of goods or services and are reported under the head current liabilities on the balance sheet and this account debited whenever any payment is been made.:
Merchandise Inventory A/C Dr……………………………………………$20,000
Accounts Payable A/C……………………………………………………………$20,000
Cash Disbursement Journal
These journals would be further posted in the Accounts Payable as below:
Vendor Account: Mighty Sun Suppliers
The vendor/subsidiary ledgerSubsidiary LedgerA subsidiary Ledger is a list of individual accounts that bears a similar nature. It refers to an expansion of the conventional general ledger separately used to record all the transactions related to the accounts payable and accounts receivables in a detailed manner. would accordingly be updated for Might Sun Suppliers as:
As we can see from the above tables, the vendor balance for Mighty Sun Suppliers is $0 (NIL), and the accounts payable balance is also $0 (NIL). Since both of them are precisely matching, it is not essential to prepare an entire schedule of accounts payable. If any balance amount is pending, a separate schedule of accounts payable would be required to make.
The treatment for Accounts Receivable would also be in a similar manner.
However, there needs to be some caution and consistency required to be maintained. This example is just for one supplier and one month. There could be multiple entries and multiple vendors for a firm. Hence, there should be a proper mechanism in place with no room for errors since reconciliation can be a difficult task.
Issues in Matching
The below are the ways through which the General LedgerGeneral LedgerA general ledger is a book of accounts that records the everyday business transactions in separate ledger accounts. The entries made in a ledger can be verified by getting a NIL balance on summing up all the ledger account amounts in the trial balance. control can get out of sync with the Accounts Payable:
- A manual entry has been made in one of the books, and no other record has been maintained. This will make reconciliation difficult.
- Posting to General Ledger (GL) from Accounts payable module may have been turned off at some point in time. This is especially in case of computerized recording of entries.
- A posting task may have been interrupted either due to human error or power failure during the job. A transaction log should be considered for out-of-balance entries. In case a complete batch is missing, the invoice history should be compared with the ledger.
- There is a possibility of all posting occurring successfully at the time of entry, but the file got damaged in the interim. As a prevention method, copies of the file should be stored in a physical or electronic format.
Advantages of Accounts Payable Ledger
- This ledger can offer a quick snapshot of the current vendor balances.
- It’s useful as a model for internal control and audit purposeAudit PurposeThe primary purpose of an audit is to conduct an independent and unbiased verification of all financial and non-financial material information to ensure that it is in line with what the management has reported..
- Managers and book-keepers can compare the subsidiary balance with the general ledger balance for the prevention of errors.
- It further helps in the segregation of duties amongst employees. There would be a separate employee recording the transaction and another one checking for potential errors. It will ensure efficiency and strong internal controlInternal ControlInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company..
- This information can be used for creating an aging report which will further show the name of the vendor with individual overdue notices. It also highlights the outstanding amount for every invoice that has gone unpaid. The changes in Cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. caused would also get highlighted.
- Additionally, if there as an increase in the number of late invoices, it may highlight problems with the accounts receivableAccounts ReceivableAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet. collections. It points out that customers are taking a longer time than usual to pay, which may require immediate attention.
The existence of Accounts Payable ledger is not mandatory but preferable for keeping the books of accounts clean and organized. Such ledgers help in keeping track of payments receivable and payable for multiple years. It is a critical tool during the audit process as well and can be successfully linked in case of investigating individual entries.
Chartered Accountants or individuals with a degree in commerce background can perform such tasks, which makes it easier for small offices and vendors to maintain such accounts.
This article has been a guide to Accounts Payable Ledger and its definition. Here we discuss how to prepare accounts payable ledger along with practical examples and explanations. You can learn more about accounting from following articles –