Payables deal with paying vendors (including the government). If your payments are few or mostly in cash, it's probably best to just record them in the General Journal. The typical transaction is <date> <cash / amt– expense / amt+..> <comments>, where <comments> include who you paid.
However, if you make many payments... generally to invoices received... with payments generally made by check... it pays to set up a Payables system.
A Payables system involves a Purchase Journal — in which all vendor invoices received are recorded — and a Purchase Disbursements Journal — in which all payments to those vendors are recorded.
The typical record in the Purchase Journal is <date> <payable / amt– expense / amt+... > <comments>, where <comments> include vendor (name or number) and any other data you may wish to record, like date-scheduled-to-pay, vendor-invoice-number, etc.
Note: Keep in mind that if you use vendor numbers you will need a "key" — paper listing or computer file — associating the vendor numbers with vendor names, and perhaps other vendor data, e.g., address / phone / fax of where you order from, where you pay to, any special payment terms you have with that vendor, etc.).
Purchase Disbursements Journal
The typical record in the Purchase Disbursements Journal is <date> <check-nbr> <cash / amt– payable / amt+> <comments>, where <comments> include vendor (name or number) and any other data you may wish to record. Note that the transactions in these two Journals, netted together, reduce to the cash/expense transaction we showed in the first paragraph.
If you're doing paper accounting, it's recommended you set up a separate checking account used only for Payables. The reason for this is that your Purchase Disbursements Journal then becomes a sequential listing of your check numbers — making it immediately obvious if any have been lost or stolen.
If you're doing computer accounting, that's not as important because the computer can detect missing check numbers. (But make sure you have, get, or write software that can.)
With paper accounting, the transactions in these Journals are periodically (weekly or monthly) summarized into a Payables Ledger, by vendor (see earlier article, Paper Accounting). This lets you easily see how much you owe to whom, compile Payables Aging Statements for your bank, etc.
Note: A Payables Aging Statement is a list of active vendors with the amount due them in columns labeled, e.g, Current, Over 30 days, Over 60 days, Over 90 days, etc.
With computer accounting, it's not necessary to keep Purchase and Purchase Disbursements transactions in separate files since much of the data is redundant. Rather they can be recorded directly in what, in a paper system, would be considered a Payables Ledger.
Essential data is <vendor> <date-paid> <check-nbr> <date-rcvd> <payable / amt– expense / amt+...> <comments>. Using an undefined <check-nbr>, e.g., 0000, allows <date-paid> to serve as date-scheduled-for-payment until such time as payment is actually made (whereupon <date-paid> becomes the real payment date and <check-nbr> becomes the real check number).
From this data, the computer can look at <date-rcvd> to compile a hard-copy Purchase Journal and at <date-paid> (and <check-nbr>) to compile a hard-copy Purchase Disbursements Journal... or to print a Payables Aging Statement... or to print the actual checks themselves.
Other useful data can be included in <comments> — for example, the last 4 or 5 digits of vendors' invoice numbers. This makes it easier to check the payment status of an invoice when vendors call... Or coding that allows you to distinguish different classes of invoices from the same vendor, e.g., utility bills for different facilities paid to the same vendor... Or coding that allows you to distinguish the "real" vendor from the payee, e.g., when the invoices are to be paid to a factor... Or coding that allows you to distinguish which line-items of a Purchase Order are being billed by the invoice... Etc.
Caution: The Ledger format shown above applies only if you pay "whole" invoices. If you may make "partial" payments on invoices, you'll need to add a "keying" system as we'll describe under under Receivables Accounting.
The "..." shown in the Payable Journal transaction field denotes that the <payable-amt> may be divided among multiple expense accounts. For example, with the Post Office now in retail, you might buy both stamps and mailing supplies from them. The transaction would be, payable / amt– postage / amt+ supplies / amt+ — assuming you wished to account postage and supplies separately.
When you buy something from a remote vendor, you could account it as, payable / amt– expense / amt+ . Or as, payable / amt– expense / amt+ freight-in / amt+ , if you wanted to watch your incoming shipping costs (a good policy)... Or as, payable / amt– expense / amt+ freight-in / amt+ sales-use-tax / amt+ , if part of the bill was sales-use tax... Etc.
And, under U.S. tax law, not everything you buy can be directly expensed, i.e., accounted to an expense-account.
For example, inventory (products bought for resale, materials bought to manufacture products to be sold, etc.) can't be expensed until sold — and in the meantime are accounted in an inventory asset-account, e.g., payable / amt- inventory / amt+ .
Depreciable property (buildings, machinery and equipment, furniture and fixtures, etc.) may only be expensed over time (i.e., depreciated) — and is accounted in a property asset-account, e.g., payable / amt– property / amt+ .
How do you know when you need to add a new account to your Chart of Accounts? Whenever it's required to be reported separately on a tax return. And — if you're using your financial records to manage your finances — whenever a definable expense becomes "significant". For example, if your Selling Expenses are running about 10% of sales, if your advertising expense... or literature expense... starts approaching 1% of sales, those expenses should certainly be called out as separate accounts.
And what payments might not be made out of Payables? Any payments made with other than Payables checks, e.g., cash payments (minimize — checks are a better record), transfers into Payables checking (i.e., checks written with Cash-in-Bank or Money-Market checks to replenish Payables checking), Payroll (if you have a Payroll checking account), replenishment of Payroll checking, etc.
If you have a Payables account, try to make all payments with Payables checks — even where that requires simultaneous Purchase and Purchase Disbursement transactions (e.g., paying a shipper at the door for a C.O.D. delivery).