Accounts Payable

Discussion in 'General Accountancy Discussion' started by Perry, Feb 22, 2012.

  1. Perry

    Perry

    Joined:
    Feb 22, 2012
    Messages:
    1
    I am building custom accounting software for my company and need to solve a problem with accounts payable. Accounts Payable from what I read is considered short term liability while credit accouts such as credit cards or line of credit are considered long term liability.

    In general when my users receive bills these are the transactions I perform:
    - AP goes down (since normal balance is neg)
    - Expense goes up

    For credit card bills what I have been doing is:
    - AP goes down
    - Credit card account goes up (so less money is owed)
    - Interest expense goes up (if carying a balance)

    So what has occured here is that I have moved a portion of the liability from the credit card account to the AP account, both being liability accounts.

    Although the balance sheet still reports the net amounts correctly there is a problem that a long term liability has been converted to a short term liability for the time that the bill has been entered until it has been paid (usualy 30 days). Is this a problem or standard practice?

    If this is wrong then what is the solution? I am thinking of two possible workarounds so the balance sheet reports correctly.

    1. Upon bill entry instead of offsetting the AP with the credit card account, I could offset it with a short term liability contra account. This way the long term liability can remain on the credit card account's balance sheet until payment is actualy performed. The contra account and the AP entry will then cancel each other out on the balance sheet until payment occurs. At payment time the contra is undone and the credit card is credited.

    2. The other option I see is to skip the AP altogether at bill entry time for bills that affect long term liability accounts since that liability is already in the books and only credit the credit card account at payment time. With this option the AP will not show the credit card bill in the total aggregation.

    I don't know which is the accepted practice or if there is another practice I am not aware of.
     
    Last edited: Feb 22, 2012
    Perry, Feb 22, 2012
    #1
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  2. Perry

    Fumita

    Joined:
    Feb 28, 2012
    Messages:
    12
    Hi,

    I think you may have gotten turned around with the initial interpretations....

    Trade credit offered to a customer as them paying for a good on credit would be booked to shortterm liabilities as a Trade Receivable and the booking is Dr Bank Cr TR (plus interest as and when paid)

    A Line of credit taken out by a company is a loan and should be split into current and longterm portions depending on length of loan and local GAAP on what definition of short term is.

    A credit card unless you are the credit company would be accounted for the same as a cash transaction

    If you ARE the credit card company the Interest is your revenue minus COF on maintaining liquidity between charge and payment

    Hope that helps.
     
    Fumita, Feb 28, 2012
    #2
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