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Accounts Payable Examples

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Explanation of Accounts Payable Examples

#1 - Raw Materials/Power/ Fuel Purchase for Manufacturing Companies

A manufacturing company needs raw material, power, and fuel to complete the process of manufacturing and production. So, these items consumed in large quantities cannot be purchased in cash and hence are bought on credit with a credit period generally of 30 days or more. Therefore, until the payment is made, the suppliers of raw materials, power, and fuel will appear as Accounts payable.

#2 - Transportation and Logistics

Raw materials must be taken from the Warehouse of the Supplier to the place of manufacture. Similarly, goods that are produced need to be taken to the warehouse for storage or directly to the buyer's place. So, there may be different modes of transportation (Land, Sea, and Air), and in some cases, more than one mode of transportation might be used. So instead of owning these vehicles and incurring expenses of other overheads, it is convenient to use logistics and transportation service providers.

Similarly, goods that must be imported or exported must go through many processes complying with local regulations. Also, these goods may be required to be stored at a warehouse in the port. These services will require service providers with some expertise. Hence clearing and forwarding agent services will be used. And in all cases where cash is not immediately paid to settle the services received, Accounts payables are impacted and adjusted for whenever cash is paid.

#3 - Assembling and Subcontracting Works

Although a company has its manufacturing unit, specific processes might still require subcontracting to another company. It is because the other company might be an expert, or the manufacturing company does not have the necessary resources or licenses to do a particular work.

For example, Apple uses the services of companies in China for assembling its iPhone. Therefore, service payments pending to these Chinese companies will be a part of accounts payable in the books of Apple.

#4 - Travelling

Consider a company that is involved in installing and commissioning telecommunication equipment all over India. Hence network engineers from the company must travel continuously. Thus it is beneficial to include a cab provider who provides services all over India. It will help in bringing down the cost of the project.

Example:

Mango Ltd. Engaged in the Below Transactions During March 2019

Mar 01: Purchased INR 80000 of inventory on credit from Grapes Ltd. and paid transportation charges of INR 600.
Mar 02: Returned damaged goods to supplier worth INR 12000
Mar 08: Services received on credit from Orange Ltd. INR 8000
Mar 09: Paid cash for inventory purchased and services records.
Mar 15: Mr. Mango traveled to Delhi for an official visit. Tickets were booked via MMT on credit for INR 5000

Below are the accounts payable journal entries

Solution:

#5 - Equipment

A mobile network provider requires telecommunication equipment and infrastructure. The products are supplied to these network providers at a credit period of nearly six months. Telecommunication equipment is complex and involves innovative technologies. So, network providers who have spectrum licenses use these providers to build their infrastructure. Only then will they be able to provide service to many people. Example: Swedish gear maker is a vendor to RCOM providing relevant equipment and infrastructure and is classified as an account payable until payments are made for services provided.

#6 - Leasing

Continuing the previous example of account payable, but instead of purchasing the equipment, if we lease it, the payments pending to lessor forms part of accounts payable. A lease is considered an alternate because of the costliness of the capital expenditure involved. Example: An Airline operator takes aircraft on lease from the aircraft manufacturers.

#7 - Licensing

A person who has exclusive rights with the right over a product grants the license to use that product for a price, which is a License fee. For example, consider a company that wants to use Antivirus or internet security software. The licensor provides the right to use the software for a year for a particular number of systems for a specific price.