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 payable 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, FOB 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 entries:
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 ledger would accordingly be updated for Might Sun Suppliers as:
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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 Ledger 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 purpose.
- 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 control.
- 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 flow caused would also get highlighted.
- Additionally, if there as an increase in the number of late invoices, it may highlight problems with the accounts receivable 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 –