Accounts Payable Flashcards
What is the definition of accounts payable?
A liability to a creditor, carried on open account, usually for purchases of goods and services.
Definition from Webster’s New Universal Unabridged Dictionary.
What does it mean when a company purchases goods on account?
The company orders and receives goods in advance of paying for them.
What is recorded in the Accounts Payable account?
Vendor’s bill or invoice when goods are received on credit.
What type of balance does Accounts Payable normally have?
A credit balance.
What happens when an account payable is paid?
Accounts Payable is debited and Cash is credited.
Under the accrual method of accounting, when must a company report a liability?
No later than the date they were received.
What is the primary role of the accounts payable process?
To ensure that only legitimate and accurate vendor invoices are entered into the accounting system.
What documents are reviewed in the accounts payable process?
Purchase orders, receiving reports, invoices, contracts.
True or False: An account payable at one company is an account receivable for the vendor.
True.
What is a purchase order (PO)?
A document prepared by a company to communicate and document its order from a vendor.
What is a receiving report?
Documentation of the goods a company has received.
What is the three-way match in accounts payable?
Comparison of the purchase order, receiving report, and vendor invoice.
What is a voucher in the accounts payable process?
A document that ‘vouches for’ the completeness of the approval process.
What should companies do to prevent duplicate payments?
Pay only from vendor invoices; never pay from vendor statements.
Fill in the blank: The accounts payable process should have _______ to safeguard a company’s cash and assets.
[internal controls]
What can happen if vendor invoices are not paid when due?
Supplier relationships could be strained and vendors may demand cash on delivery.
What happens if a vendor invoice is recorded twice?
Liabilities will be overstated and repairs expense will be overstated.
True or False: A vendor invoice may involve a bill for a repair service.
True.
What is the treatment for a vendor invoice for expensive equipment?
Recorded as an asset in the balance sheet section property, plant, and equipment.
What is the impact of paying bills too soon?
There may not be cash available to pay other bills by their due dates.
What is typically included in a purchase order?
PO number, date prepared, company name, vendor name, item description, quantity, unit prices.
What is the consequence of a poorly run accounts payable process?
Inaccurate financial feedback on the company’s performance and financial position.
What does the balance in the Accounts Payable account indicate?
Amounts owed for vendor invoices that have been recorded but not yet paid.
Where are vendor invoices for property, plant, and equipment reported?
In the company’s balance sheet section property, plant, and equipment.
What happens to the cost of equipment as it is utilized?
Its cost is moved from the balance sheet to the income statement account Depreciation Expense.
What is a common example of a vendor invoice requiring advance payment?
An insurance company’s invoice for premiums covering future insurance.
When a vendor invoice for prepaid expenses is received, what is the initial accounting treatment?
Debited to a current asset such as Prepaid Expenses.
How is the cost of insurance allocated as it expires?
Allocated to Insurance Expense.
Fill in the blank: A prepaid expense is initially recorded in a current asset account and will be allocated to _______ as the cost expires.
expense.
What is the total insurance premium paid in December for coverage from January 1 to June 30?
$6,000.
How much of the insurance premium is expensed each month from January to June?
$1,000.
What should the accounts payable staff be instructed regarding vendor invoices?
Proper accounts to be debited when vendor invoices are entered as credits to Accounts Payable.
True or False: Generally, a cost that is used up and has no future economic value is debited immediately to expense.
True.
What is the accounting treatment for vendor invoices for property, plant, and equipment?
Recorded in a balance sheet asset account and expensed in increments during the asset’s useful life.
What is crucial for the accounts payable processing at the end of every accounting period?
It must be up-to-date.
What may happen if the accounts payable processing is not up-to-date at the end of an accounting period?
Omitting some expenses from the income statement and some liabilities from the balance sheet.
What should accounts payable staff examine closely during the first few days after an accounting period ends?
Incoming vendor invoices.
What is the significance of a $900 repair bill received on January 6?
It may be a December repair expense and a liability as of December 31.
What can a vendor invoice received on January 6 indicate if it was not an obligation as of December 31?
It is actually a January expense.
