ACCOUNTS PAYABLE

Accounts Payable is a liability account that arises from purchase of goods, materials, supplies, or services
to be used in the normal operating cycle of an entity on an open account basis or obligation not supported
by formal promises to pay.
Other term for accounts payable is trade accounts payable.

I. Recognition
- Company typically records accounts payable in their books when they receive goods or when they get
invoices from the supplier as long as the company becomes a party to the financial instrument.

II. Measurement
- Measured at fair value (equal to the invoice price of the goods)

III. Accounting for Accounts Payable

Transactions Effect in Accounts Payable Journal Entries
1. Purchases made on account Purchases xx
Increase
Accounts payable xx
2. Payments to suppliers beyond the Decrease (amount of cash Accounts payable xx
discount period.* paid) Cash xx
3. Payments to suppliers within the Accounts payable xx
Decrease (amount of cash
discount period * Cash xx
paid + Discount)
Purchase discount xx
4. Purchase returns or allowances Decrease Accounts payable xx
Purchase return or allow. xx
5. Notes payable due to overdue accounts Decrease Accounts payable xx
payable Notes payable xx
*depends if gross method or net method
Discounts:
a. Trade Discount – A trade discount is a reduction in the list price of goods or services offered by suppliers
to their customers, usually based on bulk purchasing or other business agreements. These are deducted
to the list price to arrive at the invoice price for initial recognition of accounts payable. Basically, Accounts
Payable are recorded net of trade discounts.

List price xx
Trade discount (xx)
Invoice price xx

b. Cash Discount - A cash discount is an incentive offered by a seller to a buyer to encourage early payment
of an invoice. This discount can help the seller improve cash flow and reduce the risk of late payments.
These are stated in terms like 2/10 n/30, 3/15 n/60, and etc.
There are two methods of accounting for cash discounts as summarized below:
Gross Method Net Method
Record Purchases on Account
Purchases xx Purchases* xx
Accounts payable xx Accounts payable* xx
Record Purchase Returns
Accounts payable xx Accounts payable xx
Purchase returns and allowances xx Purchase returns and allowances* xx
Payment within discount period
Accounts payable xx Accounts payable* xx
Purchase discounts xx Cash xx
Cash xx
Payment beyond discount period
Accounts payable xx Accounts payable* xx
Cash xx Purchase discount lost xx
Cash xx
*Net of the highest possible cash discount offered.

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Problem 1: On March 1, 2022, Glycerin Company purchased merchandise with a list price of P1,000,000. The
supplier allowed trade discounts of 20% and 10%. Credit terms were 2/10, n/30. On March 7, 2022, the company
returned damage merchandise worth P20,000.
Requirements:
1. What amount shall be recognized as accounts payable on March 1, 2022 assuming the purchase is
recorded using the:
(a) Gross method
(b) Net method
2. Provide the journal entries using (1) gross method and (2) net method if the company settles the
outstanding account on:
(a) March 11, 2022
(b) March 31, 2022
Goods still in transit:
There are times that goods purchased are from different places and need to be shipped in order to arrive at
company premises. As a result, there is a time lag between the incurrence of liability and the actual receipt of
invoice. The recording of accounts payable will now depend on the transfer of legal title based on the shipping
terms.
Shipping Terms: When to record accounts payable
FOB Shipping Point Upon shipment of the goods from the point of
shipment
FOB Destination Upon receipt of the goods at the point of destination

Freight-in (Freight Charges) - refer to the cost incurred to transport goods from one location to another. The rule
is whoever owns the goods based on the shipping terms, are the one who is responsible to pay the freight charges.
However, that is not always the case. Sometimes the other party who is not responsible for the freight charges is
the one who paid the freight charges. Thus, to segregate, there are two freight payment terms:
a. Freight Collect – buyer made the actual payment for the freight regardless of the shipping terms.
b. Freight Prepaid – seller made the actual payment for the freight regardless of the shipping terms.
Party responsible for Party who actually paid Effect on Accounts
Shipping Terms
the payment of freight the freight payable
FOB Shipping point:
a. Freight Collect Buyer Buyer No effect
b. Freight Prepaid Buyer Seller Increase
FOB Destination:
a. Freight Collect Seller Buyer Decrease
b. Freight Prepaid Seller Seller No effect

Problem 2: On December 31, 2023, Benzyl Corporation has accounts payable of P1,000,000 before possible
adjustment for the following:
(a) Goods in transit from a vendor to BENZYL on December 31, 2023 with an invoice cost of P50,000
purchased FOB shipping point was not yet recorded. The goods were received in January 2024.
(b) Goods shipped FOB shipping point from a vendor to BENZYL was lost in transit. The invoice cost of
P20,000 was not yet recorded.
(c) Goods shipped FOB destination from a vendor to BENZYL was lost in transit. The invoice cost of P10,000
was not yet recorded.
(d) Goods shipped FOB shipping point from a vendor to BENZYL on December 31, 2023 amounting to P8,000
was recorded as purchase. The goods were received in January 2024.
(e) Goods in transit from a vendor to BENZYL on December 31, 2023 with an invoice cost of P10,000
purchased FOB destination was not yet recorded. The goods were received in January 2024.
(f) Goods with invoice cost of P15,000 was recorded. It was found out that the goods were shipped from a
vendor under FOB destination. These goods were actually received by BENZYL on January 3, 2024.
How much is the adjusted balance of accounts payable on December 31, 2023?

Unreleased, Stale and Postdated Checks:

a. Unreleased checks – refers to checks that have been written and recorded in the books of the payor but
has not been physically mailed, handed over, or otherwise released to the payee.
b. Stale checks – checks made but not yet encashed by the payee within 180 days after the indicated in the
check.

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 c. Postdated checks – refers to checks that bear a future date beyond the reporting date. Example: Checks
dated January 3, 2024, written on December 3, 2023, and reporting date of December 31, 2023.
The effect of these checks implies that the cash in bank account and accounts payable were already deducted by
making this entry:
Accounts payable xx
Cash in bank xx

Because of the three checks mentioned, an adjusting entry is necessary by reversing it since accounts payable is
still outstanding and cash in bank has not been deducted.
Cash in bank xx
Accounts payable xx

Problem 3: As of December 31, 2023, Limonene Company reported ending balance of P1,500,000 in accounts
payable. Also, as of the same date, the Company had the following information about the checks it prepared:
a. A check amounting to P120,000 was released only on January 5, 2024.
b. A check amounting to P80,000, dated December 20, 2023, was made last December 1, 2023.
c. A check amounting to P60,000, dated January 6, 2024, was made last December 15, 2023.
Determine the adjusted balance of accounts payable as of December 31, 2023.

Comprehensive Problem:
CACAO Company's accounts payable balance on December 31, 2022, totaled P2,000,000 before any adjustments
relating to the following:
(a) On December 29, 2022, the company wrote and issued checks to suppliers totaling P700,000. These checks
were recorded on January 5, 2023.
(b) On December 30, 2022, the company purchased and received goods for P300,000, terms 2/10 n/30. The
company records purchase at net amounts. The invoice was recorded and paid on January 6, 2023.
(c) Goods shipped on December 21, 2022, from a vendor to the company under terms FOB Destination were
received on January 2, 2023. The invoice cost was P130,000. The purchase was recorded on January 2, 2023.
(d) Goods shipped on December 28, 2022, from a vendor to the company under terms FOB Shipping point were
received on January 4, 2023. The invoice cost was P240,000. The purchase was recorded on January 4, 2023, since
the invoice was also received on that date.
(e) Bought goods from a vendor on December 28, 2022, under FOB Seller. The said goods are still in transit as of
year-end. The invoice cost was P164,000. Freight charges amounting to P4,000 was under the terms of freight
prepaid.
(f) On December 30, 2022, a vendor authorized the company to return, for full credit goods shipped and billed at
P160,000 on December 3, 2022. The company shipped the returned goods on December 30, 2022. A credit memo
for P160,000 was received and recorded by the company on January 7, 2023.
What amount should CACAO Company report as trade accounts payable on December 31, 2022?