In this accounting tutorial, Bookkeeping Help for Accounts Payable, I'm going to cover the basics of tracking and paying your small business bills. I'll cover how to classify your bills into the right accounts, and how to record your bills into an accounting journal.
So, let's talk about Accounts Payable.
It's a liability account in your Chart of Accounts, and it includes all those pesky bills you incur in running your business. This could be anything from raw materials purchases, rent and utility payments, lease payments, advertising bills, and insurance payments.
What is NOT considered Accounts Payable?
These types of bills will have their own accounts. For instance - Mortgage Payable, Vehicle Loan Payable, Capital One Payable, etc.
What IS considered Accounts Payable?
The account 'Accounts Payable' is the place to post any bill you're not going to pay right now. Anything purchased on credit (not on a credit card) or paid on a regular basis is a candidate for your Accounts Payable system.
If a subcontractor hands you a bill, and you cut them a check right then, don't bother with the account Accounts Payable. Just post the bill to your expense account "Subcontracted Services" and be done with it. But, if you're not going to pay them for 10 or 30 days, then post the bill to Accounts Payable.
To make bookkeeping help for Accounts Payable the most helpful, I need to stop for a minute and discuss posting.
Posting is a part of accounting that you may not understand. So any bookkeeping help for accounts payable should include an explanation of what posting is. Posting means to record a transaction. In the olden days, when bookkeeping was done in an actual book, journal entries were made for each and every transaction. Then these transactions were transferred to a Ledger. This is what was called posting.
Now, in a manual accounting system, you record transactions in a Cash Disbursements Journal. Many times the 'posting to a Ledger' step is skipped. A profit & loss statements is prepared right from the journals.
In a computer accounting system, you enter a bill or write a check in the system, and the system does the posting to your General Ledger, to the account (from your Chart of Accounts) that you tell it to post to.
When you get a bill from a vendor, you need to figure out what account to post to. It could be a purchase of raw materials, which would be posted to your Inventory account (an asset). Unless you don't count inventory except at year end, then you should post to your Purchases Account (Cost of Goods Sold account). It could be the electric bill, which would be posted to your Utilities account (an expense).
Go thru your Chart of Accounts, and see which account covers the type of bill that you're paying. Most expenses will be quite obvious, like Utilities or Insurance Expense. Or Lease Expense.
If we represent posting a bill with an accounting journal entry, here are some examples. The first line represents your debit entry, and the next line represents your credit entry.
Insurance Expense $100
Accounts Payable $100
Advertising Expense $300
Accounts Payable $300
Purchases Account $2500
Accounts Payable $2500
When you pay the bill, you would record a 2nd transaction, which would close out the Account Payable, and decrease your cash account for the amount of the check written.
Accounts Payable $2500
Cash in Checking $2500
When you are using a simple manual accounting system of a Cash Receipts Journal and a Cash Disbursements Journal, you wouldn't make actual journal entries, you would enter the transaction into your Cash Disbursements Journal when you write the check.
Once you write checks, enter them in your Cash Disbursements Journal.
You will probably not be using a General Ledger, because you can prepare a Profit & Loss Statement without it.
But, if you were, you would total all the transactions for a month in your Cash Disbursements Journal, and "post" or record these totals to the affected accounts in your General Ledger. For example, you would add up all the checks written for office supplies, and enter that total in your ledger for that month.
You will need to set up a filing system to hold unpaid bills and paid bills.
I suggest setting up a weekly filing system for unpaid bills. Mark the folders "week 1", "week 2", and so on. Once you get a bill in the mail, place it in the folder before its due date. It may help to write the dates on the folders too, like "week 1 - ending August 3". That will make it easier for you to pop the bills in the right folders.
Then, once a week, pay the bills in the folder for the next week. Keep in mind you need mailing time for your bills to get there before their due dates.
When you pay those bills, place them in a larger file box noted as "Paid Bills Month of ____". Keep them in check number order. This will make it easier to find a bill later if you need to reference a part or price later. And it also is what we call 'documentation' or backup for your tax return deductions.
If you'd like a more detailed discussion of this process, go to Using a Manual Accounting System.
In a computer accounting system, the process is a little different.
When you get a bill that you aren't going to pay right away, you would enter it in the software as a voucher. A voucher is simply a version of the bill in the software. You would enter the items purchased and the costs of each. Then you would enter the account number of these items. This tells the computer which accounts to post those amounts to. It would post to whatever expense account you noted, and also post to Accounts Payable.
Then when you pay the bill, you would go to a section with a name something like 'pay bills'. You would pick which bills to pay, and then print the checks. The computer software takes care of the posting to Accounts Payable and to Cash.
If you're using QuickBooks, see Getting Started with QuickBooks.
So, here's a summary of bookkeeping help for Accounts Payable.
Familiarize yourself with your Chart of Accounts, so you know which accounts to post your bills to.
If using a manual system, keep bills in a folder by due date until you pay them. Then when you pay them, enter the checks in your Cash Disbursements Journal. Keep the bills that are paid in a 'paid bills folder' by month in your accounting files. These are backup for your tax return deductions.
If using a computer system, enter your bills into your software as vouchers. Once a week (or sooner if necessary) go to 'pay bills', pick the bills that are due, and print checks. The software does the posting. Keep copies of the paid bills as above.
Hopefully, this accounting tutorial, bookkeeping help for Accounts Payable, has been helpful to you. If you would like further help with either a manual or computer system, please use the links above for more detailed tutorials of each.
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