CREDIT ACCOUNTS: WHAT THEY CONSIST OF AND EXAMPLES - DUDAS - 2024

Credit accounts are an accounting entry that represents the obligation of a company to pay a short-term debt with its creditors or suppliers. It appears on the balance sheet, within current liabilities. They are also sometimes called accounts payable or trade creditors.

At the corporate level, they are debts that must be paid within a specified period to avoid default. The payment is essentially a short-term obligation of the company to another entity.

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Another common use of the term "creditor accounts" refers to the business department that is responsible for making payments due to vendors and other creditors.

In creditor accounts, a simple mistake can cause an overpayment. A common example involves duplicate invoices. An invoice could be temporarily misplaced or still in approval status when providers call to check on your payment status.

After the creditor accounts department staff look for it and discover that it has not been paid, the vendor sends a duplicate invoice. Meanwhile, the original invoice appears and is paid. Then the duplicate invoice arrives and is also inadvertently paid.

What are creditor accounts?

If a supplier grants a credit and invoices for a product or service so that payment is made at a later date of 30 days, 60 days, etc., then as long as the company owes the supplier the money, this account is classified as a business credit account.

To record creditor accounts, the accountant credits these accounts upon receipt of the invoice. Then when the bill is paid, you debit the creditor accounts.

Credits are a form of credit that vendors offer to their customers to allow them to pay for a product after they have received it.

Suppliers offer various payment terms for an invoice. These conditions can include a discount for paying an invoice within a defined number of days.

For example, the term 2%, 30 net means that the payer will deduct 2% from the invoice if the payment is made within 30 days. If the payment is made on the 31st, the full amount is paid.

Credit accounts and long-term debts

Credit accounts are a class of short-term debt. There are other short-term debts that contain expenses such as short-term loans, payroll costs, and business income taxes.

In contrast, long-term debts include: lease payments, retirement benefits, individual notes payable, and a range of other long-term debts paid.

Credit accounts vs. commercial notes payable

Although some people commonly use the phrases "credit accounts" and "trade notes payable," these phrases describe similar but subtly different things.

Trade notes payable is the money a business owes vendors for inventory-related items. For example, supplies or materials that are part of the business inventory. Credit accounts include all short-term debts or obligations

For example, if a restaurant owes money to a food or beverage company, those items are part of inventory. Consequently, it is part of your trade notes payable.

On the other hand, debts with other organizations, such as the company that washes the uniforms of the restaurant staff, fall into the category of creditor accounts.

Some accounting methods integrate both categories in the category of accounts payable.

Credit accounts vs. accounts receivable

Accounts receivable and credit accounts are essentially opposite. Credit accounts are the money that a company owes its suppliers. On the other hand, accounts receivable are money owed to the business.

If a company has an invoice in its accounts payable department, the company to which those funds are owed categorizes that same invoice in accounts receivable.

Creditors conciliation

The normal balance for creditor accounts is a credit balance. Additional bills added to creditor accounts will increase the credit balance. Payments to vendors will decrease that balance.

In addition, there will be adjustments related to discounts received, bug fixes, vendor debit notes for returned products, etc. Each of them will affect the account balance.

The creditor account balance formula reconciles the beginning and ending balances in the creditor accounts.

Final creditor account balance = initial creditor account balance + credit purchases - cash payments.

At the end of each accounting period, the ending balance of each creditor account can be reconciled with the separate account statement received from the provider.

This report shows the balance that the provider believes is outstanding. If the final balance in the supplier's creditor account is not in accordance with this statement, then the purchases, payments and adjustments must be verified to understand why they are different, and the corresponding corrections must be made.

Examples

Example 1

Suppose a company receives a bill for $ 600 for office supplies. At the moment that the creditor accounts department receives this invoice, it registers a credit of $ 600 in the creditor accounts field and a debit of $ 600 in expenses of office supplies.

As a consequence, if someone looks at the balance in the creditor account line, they will see the total amount that the company owes to all suppliers and short-term lenders.

Subsequently, the company issues a check for payment of the invoice. In this way, the accountant registers a debit of $ 600 in the checking account and enters a credit of $ 600 in the column of creditor accounts.

Example 2

Let company A purchase products on credit from company B. The amount received must be paid within 30 days.

Company B will record the same sale as accounts receivable and Company A will record the purchase as accounts payable. This is because company A has to pay company B.

According to the accrual accounting methodology, this will be treated as a sale, even if the money has not yet been transferred from hands. The creditor accounts department must be extremely careful when processing transactions related to these accounts.

Here, time is of the essence, as this is a short-term debt that must be paid within a specific period of time. Accuracy is important because it will affect the cash position of the company.

References

1. Double Entry Bookkeeping (2019). Creditors Basics in Accounting. Taken from: double-entry-bookkeeping.com.
2. Will Kenton (2018). Accounts Payable - AP. Taken from: investopedia.com.
3. The Economic Times (2019). Definition of 'Accounts Payable'. Taken from: economictimes.indiatimes.com.
4. Wikipedia, the free encyclopedia (2019). Accounts payable. Taken from: en.wikipedia.org.
5. Harold Averkamp (2019). Accounts Payable (Explanation). Accounting Coach. Taken from: accountingcoach.com.