All about America

Accounts Payable

Accounts payable is a frequently used account—it is used whenever a company buys anything on credit. This might be inventory, office supplies, or equipment. When the merchandise is received, the company debits the appropriate account for whatever is received (Inventory if inventory was received; Office supplies if paper clips were received, and so on) and credits Accounts payable. When payment is made, the company
debits Accounts payable (which reduces the amount owed—since the company is making a payment, it no longer owes that amount) and credits Cash. Let’s use another example.

Many companies offer their customers an incentive to get them to pay their bills faster. This is called a cash discount. If the selling company offers a cash discount, the discount will be specified on the invoice, usually with a notation that reads something like ‘‘2/10, n/30.’’ That notation is read, ‘‘2 percent discount if paid within 10 days; otherwise full payment expected in 30 days.’’ The terms can be anything a company
wants to offer. The company simply adjusts the notation to reflect the terms it is offering, such as:

1/10, n/30—1 percent discount if paid within 10 days; otherwise full payment is due in 30 days
1/15, n/20—1 percent discount if paid within 15 days; otherwise full payment is due in 20 days
2/10, n/20—2 percent discount if paid within 10 days; otherwise full payment is due in 20 days

Taken From : Accounting Demystified

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