Accounts Payable Journal Entries: Recording Bills and Payments
Learn how to record accounts payable transactions including receiving invoices, making payments, and taking early payment discounts with proper debit and credit entries.
Scenario
On April 1, Riverside Company receives an invoice from a supplier for $5,000 worth of office supplies. The payment terms are 2/10, n/30 (2% discount if paid within 10 days, otherwise net due in 30 days). Riverside pays the invoice on April 8, taking the early payment discount.
Journal Entries
April 1 — Record the purchase on credit. Debit Office Supplies (asset increases) and credit Accounts Payable (liability increases).
| Account | Debit | Credit |
|---|---|---|
| Office Supplies | $5,000 | |
| Accounts Payable | $5,000 |
April 8 — Pay within discount period. Discount = $5,000 × 2% = $100. Cash paid = $5,000 − $100 = $4,900. Debit Accounts Payable to remove the liability, credit Cash for the amount paid, and credit Purchase Discounts (contra-expense) for the savings.
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable | $5,000 | |
| Cash | $4,900 | |
| Purchase Discounts | $100 |
Explanation
Accounts payable represents money a company owes to its suppliers for goods or services purchased on credit. When the company receives an invoice, it records a liability (Accounts Payable, credit) and an asset or expense (debit). When the company pays, it reduces both the liability and its cash. Purchase discounts are recorded as contra-expenses because they reduce the effective cost of the purchase. Understanding the timing of these entries is critical — the liability is created when the invoice is received, not when payment is made.
Variations
If Riverside pays after the discount period (e.g., April 25): Debit Accounts Payable $5,000, Credit Cash $5,000. No discount is recorded.
If the purchase was for inventory instead of supplies: Debit Inventory $5,000 instead of Office Supplies. The payment entries remain the same.
Common Mistakes to Avoid
- ✗Recording the purchase discount at the time of purchase instead of at the time of payment
- ✗Forgetting to remove Accounts Payable when making the payment (double-counting the liability)
- ✗Confusing Purchase Discounts (buyer's account) with Sales Discounts (seller's account)
- ✗Recording cash payment for the full amount and forgetting to account for the discount taken
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Common questions about this journal entry
Accounts Payable are informal obligations to pay suppliers, typically due within 30-90 days with no interest. Notes Payable are formal written promises to pay a specific amount by a certain date, usually with interest. Notes Payable are often used for larger amounts or longer repayment periods.
Purchase Discounts is a contra-expense account that reduces the total cost of purchases (and ultimately Cost of Goods Sold). It appears as a reduction from gross purchases on the income statement, lowering the company's reported expenses.
This is a common credit term meaning: 2% discount if paid within 10 days, otherwise the net (full) amount is due within 30 days. The first number is the discount percentage, the second is the discount period in days, and n/30 is the total credit period.