The basics must be revisited to maintain sound financial health in a business. One of such basics is the T account for accounts payable.
Revisiting the financial basics will help ensure that any possible problems arising from these areas are seen on time.
The T-account is one of the fundamental concepts in accounting. Understanding how to incorporate the T account principle accounting for account payables will make a lot of difference in the financial records of any business.
Meaning of Accounts Payable T-Account
The accounting concept of T-accounts derived its name from the T-format in which records were presented. The T-account makes it possible to present the double-entry format in a visual form. The T-account has a left side and a right side.
While the left side is used in recording debit entries, credit entries are imputed on the right side of the account. While opening a T-account, ensure that the title of the account is boldly written at the top bar.
The T-account simplifies the concept of double-entry. Whenever a transaction is debited on the journal, there must of necessity be a corresponding credit entry to balance it out. Similarly, a credit entry in one account will automatically result in a debit entry in another. This helps to ensure balance in the books.
You must first understand the debit and credit system to understand the double-entry system. Each debit and credit entry acts as a technique for balancing the records entered in both the company’s income statement and balance sheet.
How the Account Payable T-account works
There are two parties to every business transaction. On one hand, is the buyer while on the other is the seller. When a transaction pulls through, the seller will record such transactions in accounts receivable.
This is because the seller is expecting to receive cash from the buyer for such a transaction. That same transaction is recorded in accounts payable by the buyer.
A double-entry bookkeeping system will ensure that a business keeps track of all transactions. The best way to record a double-entry transaction is the T-accounts.
Many people find it difficult to determine which transaction is debited or credited. The T-account makes it easy to post transactions where they belong.
Is Accounts Payable Debited or Credited on the T- Accounts?
When a company makes any credit transaction, the business creates an account payable where this credit transaction is recorded.
Accounts payable are credit transactions businesses must pay back within a specific period. Most accounts payable are paid back within a period of 30 to 90 days.
Account payable can be recorded either as a credit or debit transaction depending on where it is recorded. Account payable is a liability account.
As a result of it being a liability, it always has a credit balance. A credit entry will show what the company owes at a time.
Why is an account payable a liability?
Whenever a business orders goods or contracts the services of others without paying cash upfront, the business incurs a liability that has to be paid off sometime in the future. Most of these bills are generated based on a billing cycle.
Not paying up within the agreed period may result in a low account payable turnover ratio. A low account payable turnover ratio may affect your creditworthiness.
The business will credit the accounts payable whenever a business makes credit purchases. On the other hand, each time a business pays its suppliers, the amount paid will be entered on the debit side of the accounts payable. This double-entry will ensure that there is balance in accounting.
The Role of T-Accounts in Accounting System
Over the years, the double-entry system of accounting has gradually earned a reputation as the most common bookkeeping method. The T-account is very crucial in maintaining balance in the accounting system of any organization.
For an account to balance, a business transaction credited in a particular account must be debited in another and vice versa.
One of the easiest ways to resolve a discrepancy in the balance sheet is to ensure that the T-account entries are entered accurately.
While it is common to believe that every debit entry in the T-account means a decrease and a credit entry means an increase, this may not always be true.
How T-account helps Businesses to Track Expenses
With T-account, tracking a business’s spending becomes as easy as a walk in the garden. At a glance, you can tell the journal entries that have taken place over a specified period.
T-account remains to date one of the best ways to track and manage business expenses.
While an account payable value in the balance sheet may indicate that a business is doing well or not, many other factors affect business performance.
When account payable is higher than account receivable, it may be a pointer to the fact that the business is spending more than it is receiving.
However, this information alone may not tell you for sure where the business is bleeding money from. To be able to manage your spending adequately, businesses will have to get 100% data on the subject.
To manage your spending adequately, a business will have to go through the books to discover where they are not getting it right.
Account Payable T Accounts Help in Spending Management
T-accounts make it simple for a company to keep track of its spending. You can view journal entries from a specific period.
It’s the most efficient approach to keep track of your company’s transactions. However, it does not always assist your company in making informed expenditure selections.
The balance sheet and income statements of your business are tracked by accounting software. However, it can only supply you with dynamic figures that provide a rudimentary understanding of improving spend control.
The most difficult aspect of any fast-paced business is finding areas where money is being wasted unnecessarily. In your income statement, clear signs stand out, such as the accounts payable amount being much larger than the accounts receivable amount.
However, if you don’t have clear insight into your spend management, you’ll be kept in the dark about how to cut costs.
Worse, some balances may be inflated or deflated, creating an image that may or may not reflect fact. As a result, your working capital, cash flow, and bank account will suffer.
Journal Entries for Debit and Credit Transactions
The record of accounting transactions is known as journal entries. Recording such transactions requires one to know the applicable rules to avoid errors.
Debit transactions are mostly recorded on the left while credit transactions stay on the right.
When a company has outstanding bills to pay, it is recorded as liabilities. These liabilities may be current or accrual.
A typical example of a current liability is the account payable. The rule guiding liabilities is that all increases are entered as credit transactions while decreases appear ok the journal as debits.
Example
Johnson Beverages purchased equipment worth $250,000 from its supplier on credit. The transaction will be entered in the journal as follows:
Debit entry: Inventory account ($250,000)
Credit entry: Accounts Payable ($250,000)
The equipment purchased is an asset. Assets are debited on increase and credited on a decrease. Accounts payable on the other hand is a liability. Liabilities are credited on increase and debited when it decreases.
Conclusion
The T-account for accounts payable is a vital accounting system that every business should pay close attention to. Understanding how it works will go a long way in helping a business improve its accounting system.
