Accounts payable journal entry: Guide and workflow

When you purchase inventory, supplies, or services on credit, you’ll need to post an accounts payable journal entry. Although accounts payable journal entries might seem straightforward at first glance, there are a few transactions that could benefit from additional explanation. But let’s start with the basics.

What is an accounts payable journal entry?

Before we get into accounts payable (AP) journal entries specifically, let’s do a brief refresher on journal entries in general.

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Journal entries are financial transactions that you record in your general ledger (GL). Your general ledger is an accounting record that keeps track of your individual financial transactions. This includes purchases you’ve made, sales you’ve earned, expenses you’ve accrued, equity activity, and so on.

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An accounts payable journal entry is simply a journal entry that gets recorded on the general ledger where at least one side of the double entry is made to the accounts payable account. Your AP account shows the amount of money you owe to your suppliers, vendors, and other third parties.

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When you post a journal entry to accounts payable, you typically show that you:

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1. Made a purchase on credit, or
2. Paid off that accounts payable balance

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In other words, you should make an AP journal entry whenever your AP account balance changes.

What’s included in an accounts payable journal entry?

Your AP journal entry should include:

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• Date: The date the transaction took place
• Description: A description of the transaction
• Amounts: The amount that gets recorded in the double-sided journal entry

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Let’s say you purchase $1,500 worth of office supplies on credit on September 1, 20XX. Your journal entry would look like this:

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Types of accounts payable journal entries

So how do you record accounts payable? Sometimes the easiest way to understand AP is to look at some examples. Let’s go over five of the most common AP journal entries:

1. Purchasing items on credit

You submit a purchase order to your supplier for a new set of tools on August 15, 20XX. Your supplier sends you Invoice #15 and immediately ships the products.

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When you receive the invoice, you should record an entry to your AP account showing that you owe money to your supplier:

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2. Paying an invoice

You’re on net 60 terms with your supplier, so you have 60 days to make a payment before they charge interest. You make a payment 45 days later—within the 60-day timeframe—on September 29, 20XX.

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Your journal entry will show that cash went out to your supplier and that you’ve paid that obligation from Invoice #15:

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3. Paying an invoice late

Let’s say that instead of paying your invoice on time, you forget the due date and end up paying 30 days late. Your supplier assesses a flat $10 fee for any late payment and charges simple interest of 1.0% of the unpaid amount every 10 days past due. That means you’d owe $10 in late fees and $45 of interest ($1,500 * 1.0% * 3).

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Even though more cash is going out the door, the entry to your AP account wouldn’t change:

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4. Voiding an invoice

Soon after sending you an invoice, your supplier tells you they don’t have the supplies you ordered and need to cancel your order. To void the invoice, you’ll simply reverse the initial accounting entry you made:

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5. Adjusting an invoice

Let’s say that instead of fully canceling your order, your supplier tells you they can only fulfill part of it. Five days after they sent the initial invoice, they send over an adjusted invoice and tell you they can fulfill 80% of your order. Here’s the entry you should record to make that adjustment:

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Is accounts payable a debit or credit?

In double-entry accounting, you need to know whether a debit entry increases or decreases the value of an account.

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Let’s think about cash for a moment. When we post a debit to a cash account, we’re increasing the amount of cash on our balance sheet. The same goes for all other assets, including accounts receivable, inventory, and assets.

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Accounts payable is a liability account, similar to accrued expenses, customer deposits, or interest payable. Opposite of asset accounts, liability accounts increase with a credit.

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Double-entry accounting systems don’t always make sense on paper; you have to memorize the rules over time. Below is a chart that can help. If you stick to these rules, you’ll know whether your accounts payable entry should be a debit or a credit:

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The AP journal entry workflow

Here’s the general workflow you should follow when recording accounts payable:

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1. Make an order: When you order goods or services, you often don’t post anything to your AP balance just yet. In some instances, though—like for larger inventory purchases—it’s smart to record an interim entry so that your financial statements show you’ll soon have an obligation to pay. You might make a debit entry to inventory and a credit entry to a liability account called Goods Received Not Invoiced (GRNI). However, nominal purchases like office supplies don’t typically require a post to GRNI, and you can simply wait until you get an invoice to post an entry.
2. Obtain the invoice: Once you receive the invoice from your supplier or service provider, send that invoice through your invoice processing workflow
3. Process the invoice: Follow your invoice processing workflow to process the invoice. Typically, this means you’ll match that invoice to a purchase order; ensure all purchases have been delivered, or that undelivered merchandise has been noted; get the invoice approved by the appropriate party; and send the invoice to your AP department to initiate payment.
4. Post a journal entry: As part of the AP process, you should post a journal entry to accounts payable liability. You should only post this journal entry after the invoice has been approved and the numbers have been verified.
5. Pay the bill: Following your invoice payment protocols, pay the bill when it comes due, taking note of any early payment discounts or late payment penalties and interest
6. Post a journal entry: Once your invoice is paid, post a journal entry to reverse your accounts payable, showing that you’ve fulfilled your payment obligation

How do AP journal entries affect your financial statements?

Accounts payable is a liability account, so an entry to your AP account will impact your balance sheet. But because AP journal entries require you to post to other types of accounts, AP journal entries will also affect your income statement and cash flow statement.

Balance sheet

Accounts payable is a current liability. At any point in time, the balance of your AP account will show up on your balance sheet alongside other short-term liabilities like wages payable and sales taxes payable.

Income statement

Accounts payable represents an obligation to pay. When you receive an invoice, you’ll likely be posting to an expense account, which will impact your income statement.

Cash flow statement

As cash goes into and out of your business, your cash flow statement changes. When you pay off accounts payable, the Operating Activities section of your cash flow statement will show cash going out.

How might AP journal entries look different for each company?

Most AP journal entries follow the same general guidelines, but the AP accounts themselves are another story. Instead of throwing all payables into the same account, most businesses create subaccounts under AP to differentiate the types of payables they have.

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Some companies might create subaccounts for the type of purchases they’re making; others might create subaccounts for each vendor. Still others might make subaccounts for each business location. Here’s how those AP accounts might look in each case:

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Common challenges with AP

Some of the biggest challenges with accounts payable are:

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• Errors
• Fraud
• Late payments

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A great solution to many of these problems is to employ automation technology. With accounts payable automation as part of your fintech stack, your invoices will make their way through the invoice processing workflow with very little or no action on your part.

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With the right automation technology, you’ll have fewer errors, eliminate opportunities for fraud, and make all your payments on time. Automation technology may even suggest ways to save money, like by reminding you to make payments early if you can take advantage of early payment discounts.

Solve your AP challenges with Ramp

The right technology can help you solve the biggest challenges of managing AP. If you’re looking to reduce data entry errors and prevent late payments, try Ramp.

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Ramp Bill Pay uses machine learning to help you automate your entire accounts payable process, from invoice receipt to approval, payment, and invoice matching. We also integrate with leading accounting software like NetSuite, QuickBooks, and Sage Intacct to help simplify the process of making your AP journal entries.

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Learn more about how Ramp’s modern finance platform helps companies save an average of 5% a year.