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, taxes payable, and short-term loans. 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 worth of office supplies and uses its store credit to pay for them. Then, at a later time, the company uses $100 of the office supplies and, as a result, must expense it.
Relationships With Suppliers
Suppliers or vendors are the businesses from which companies get their inventory and other supplies for operations. Therefore, it is crucial that businesses 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 well as the invoices it must 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 be open to negotiations and may even provide good deals for the company, as well as suggest new and better products. Additionally, they will work with the company on delivery times and policies. Good supplier relationships typically translate into increased company efficiency. These types of relationships don't form instantaneously; they have to be cultivated.
If the company pays its bills on time, actively cultivates positive relationships with its suppliers, doesn't cut off suppliers without reason, and keeps the 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 follow a set of best practices in accounts payable management, accounts payable can have quite a positive impact on your company's profitability. First and most importantly, the company must pay its bills on time. Generally, nothing else will work if this is missing.
Second, if you pay your bills on time, you can elicit trust between you and your suppliers in spite 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.