Recording Accounts Payable - Financial Accounting

All right, so now that we're talking about current liabilities, I think the most obvious

one is accounts payable. I think we're pretty used to that, pretty familiar with that

But let's just go back and make sure we understand how to record basic current liabilities

The first one will be purchases on credit. So if we purchase something on credit, then it would be something like supplies, if that's

what we're purchasing, and then we would credit AP for that amount

Not too much of a difference there. And then once we pay that off, it's going to be cash, or should be AP, for that amount of whatever we paid off

And then cash is what we're going to credit for paying it off. Our cash goes down

We've known that since, what, chapter two we've been doing this. So that's not much, there's not much difficulty in that

Another one that we talked about back in chapter two was unearned revenues

How would we record that? Remember, unearned revenues is when somebody gives us cash up front

We still owe them the product or service So the way we do that would be we would debit cash for that amount that they gave us the prepaid what they prepaid us and then we would credit unearned revenue and then as we started to give them the product or the service probably the service over time

we will start taking it out of unearned revenue for whatever it was and then also credit whatever

our earned revenue account is whether it be service revenue or whatnot so again these are just

refreshers we've been doing these from the very beginning it shouldn't be too bad the next one is

something a little different. The next one is dealing with something that we're

probably all familiar with to a certain degree depending on where you are and

that is sales tax. So really what I'm talking to right now is there I mean

they're most I think most all states have sales tax at least to the degree of

something. Some states don't have sales tax on certain items whereas other states

have sales tax on everything but we have to keep up with them from a business

perspective. So these are the amounts the sellers has collected as sales tax from

customers when sales occur So you as the customer are paying the sales tax the business that you give the sales tax to is simply just holding it for the appropriate taxing authority So they just

going to hold it but they still owe it. So let's look at an example of that real quick. So Romeo Company sold inventory to a customer for $500 cash in a state with a 7% sales tax

The inventory originally cost Romeo Company $300 and at the end of the quarter Romeo remits the tax

due to the state taxing authority journalized these entries. So let's look at that real quick

First thing is we sold this inventory to our customers for $500. Now it says that they paid

cash for it. So we know our cash is going up. They paid cash for it. So we also know that our sales

tax is $35 because $500 times 7%. So our cash is going to go up and it's going to go up by the $500

that we sold plus the $35 in sales tax because that's what they're giving us

So Also know that my service revenue or sales revenue I guess it be sales revenue in this situation because we dealing with inventory it going to be because that what I earned from my inventory And then that we also going to have cost of goods sold for We also going to have

inventory for $300. That finishes out how we know of selling inventory. But we're off by $35

We're off by $35 on the credit side. And so what we'll call that is going to be a sales tax payable

We still owe that to the state taxing authority. So that's why it's a payable. It's not our money. I do want you to pay attention to this. It's not an expense. We're not going to have sales tax expense because that would imply that this was ours and we used it up. This was never our money. We're just putting it into payables because we're going to have to give it or we owe it to the right authority. But it was never ours to begin with. We're just holding

Now it's time to remit it to the state taxing authority. It means we're going to send it to them, pay them

So we're going to debit sales tax payable to get rid of it off of our books for $35

and then decrease our cash through credit of $35. That's how you do a sales tax payable example

Thank you