An Example of a Bookkeeping Entry of Buying on Credit
A small business often buys from a number of vendors or suppliers using store credit or credit based on their relationship with the supplier. Accounts payable, on the Chart of Accounts and balance sheet, is a short-term liability account. This account shows the total amount of supplier credit the business owes at any point in time. Accounts payable are current liabilities that will be paid off within one year.
They are short-term debt for items such as office supplies. Once they are used by the business, they are shown as an expense.
Here are the bookkeeping transactions you use for accounts payable. You make this entry in the cash disbursements journal, the cash journal, and the expense journal. The scenario is that a company buys $250 in office supplies and uses its store credit to pay for them. Then, at a later time, the company uses $100 in the office supplies and has to expense it.
Relationships With Suppliers
Suppliers or vendors are the businesses from whom companies get their inventory and other supplies. It is crucial that business operations maintain good relationships with their suppliers.
The single most important thing a company can do to maintain good supplier relationships is to pay its bills on time.
Accounts payable management, unfortunately, can get big and unwieldy. As a company grows, the number of its suppliers grows as does the invoices it has to pay.
Supplier relationship management involves a mutually beneficial relationship between the company and each supplier. Good supplier relationships provide a win-win situation for the company and the supplier.
Suppliers will cut good deals for the company. They will suggest new and better products to the company. They will work with the company on delivery times and policies. Good supplier relationships mean increased company efficiency. Good supplier/company relationships have to be cultivated.
If the company pays its bills on time, actively cultivates good relationships with its suppliers, doesn't cut off suppliers without reason, and keeps lines of communication open, a good supplier should then offer the company the best trade credit terms possible. Good trade credit terms will maximize the company's profitability.
Accounts Payable and Their Effect on Profitability
If you have a set of best practices in accounts payable management and you follow them, accounts payable can have quite a positive impact on your company's profitability. First, the company has to pay its bills on time. While this is a simple best practice, nothing else will work if you don't do this.
Second, if you pay your bills on time, you can elicit trust between you and your suppliers, regardless of how many suppliers you have. If you have trust, your suppliers will try to help you in a number of ways, including offering you discounts that will positively impact your profitability in a big way.