Accounts Payable and Purchases

Liabilities: Accounts Payable and Purchases

The Story of IOUs 📝

Imagine you have a piggy bank. But here’s a twist — sometimes you need to buy things before you have money to pay for them. Like when your mom says, “I’ll pay for this toy now, and you can pay me back from your allowance later.”

That “I owe you” is called a liability. It’s a promise to pay someone back.

Let’s discover the world of what businesses owe — and how they keep track of it all!

What Are Current Liabilities?

Think of current liabilities like short-term promises. These are debts a business must pay within one year.

The Ice Cream Truck Analogy 🍦

Picture an ice cream truck driver named Sam:

• Sam buys ice cream from a supplier
• Sam says, “I’ll pay you next month after I sell these”
• That promise to pay = current liability

graph TD
    A[Sam's Ice Cream Truck] --> B["Buys Ice Cream on Credit"]
    B --> C["Owes Supplier Money"]
    C --> D["Pays Within 30 Days"]
    D --> E["Liability Gone!"]

Types of Current Liabilities

Key Point: Current = due soon (within 12 months)!

Accounts Payable: The Tab You’re Running

Accounts Payable is like running a tab at a restaurant. You eat now, pay later.

Real-Life Example

Bella’s Bakery needs flour and sugar:

1. Orders $200 worth from “Fresh Supplies Co.”
2. Fresh Supplies delivers the goods
3. Invoice says: “Pay within 30 days”
4. Bella records: Accounts Payable = $200

graph TD
    A["Bella Orders Supplies"] --> B["Supplies Delivered"]
    B --> C["Invoice Received"]
    C --> D["Accounts Payable Created"]
    D --> E["Bella Pays Within Terms"]
    E --> F["Accounts Payable = $0"]

Why It Matters

• No interest if paid on time (usually)
• Builds trust with suppliers
• Helps businesses buy what they need now

Quick Formula

Accounts Payable = What You Bought on Credit − What You’ve Paid

Example:

• Bought: $500 on credit
• Paid back: $200
• Still owe: $300 in Accounts Payable

Purchase Discounts: Save Money by Paying Early!

What if someone said, “Pay me quickly, and I’ll give you a discount”?

That’s exactly what purchase discounts are!

The Lemonade Stand Story 🍋

Tommy runs a lemonade stand. He buys lemons from Farmer Fred:

• Invoice: $100 for lemons
• Terms: 2/10, net 30

What does 2/10, net 30 mean?

Tommy’s Choice

graph TD
    A["Invoice: $100"] --> B{Pay within 10 days?}
    B -->|Yes| C["Pay $98 - Get 2% off!"]
    B -->|No| D["Pay $100 by Day 30"]

Why This Matters

Paying early saves real money! Businesses love discounts because:

• 2% off might seem small
• But over many purchases = big savings

Pro Tip: Smart businesses almost always take the discount!

Purchase Returns and Allowances: When Things Go Wrong

Sometimes what you order isn’t right. Maybe it’s broken, wrong color, or just not what you expected.

Purchase Returns: Send the item back. Purchase Allowances: Keep the item but get a price reduction.

The Broken Toy Example 🧸

Maya orders 10 teddy bears for her toy shop at $10 each = $100 total

Problem: 2 teddy bears arrived with torn ears!

Option A: Return Them

• Maya sends back 2 bears
• Gets $20 off her bill
• Now owes: $80

Option B: Keep with Allowance

• Maya keeps the bears but asks for a discount
• Supplier says: “We’ll reduce price by $5”
• Now owes: $95

graph TD
    A["10 Bears Ordered = $100"] --> B["2 Bears Damaged"]
    B --> C{What to do?}
    C --> D["Return Bears"]
    C --> E["Keep with Allowance"]
    D --> F["Owe $80"]
    E --> G["Owe $95"]

Recording It

When you return items or get allowances, your Accounts Payable goes DOWN.

New Amount Owed = Original − Returns − Allowances

Example:

• Original: $500
• Returned goods: $50
• Allowance: $25
• Now owe: $425

Notes Payable: The Formal Promise

Notes Payable is like a more serious IOU. It’s a written document that says:

• How much you owe
• When you’ll pay it back
• What interest you’ll pay

The Bicycle Shop Story 🚲

Carlos wants to open a bicycle shop but needs $5,000 for inventory.

The Bank’s Offer:

• Loan: $5,000
• Interest: 6% per year
• Due: In 12 months

Carlos signs a promissory note — a formal promise to pay.

graph TD
    A["Carlos Needs $5,000"] --> B["Goes to Bank"]
    B --> C["Signs Promissory Note"]
    C --> D["Gets $5,000 Cash"]
    D --> E["Notes Payable Created"]
    E --> F["Pays Back $5,300 in 1 Year"]

Breaking Down the Numbers

Key Differences: Accounts Payable vs Notes Payable

Putting It All Together

Let’s see how all these work together in a business!

Meet “Sunny’s Surf Shop” 🏄

January Transactions:

1. Jan 5: Bought surfboards on credit = $2,000

   • Accounts Payable: +$2,000

2. Jan 8: Terms were 2/10, net 30. Sunny paid on Jan 12

   • Discount: $2,000 × 2% = $40 saved
   • Actually paid: $1,960

3. Jan 15: 1 surfboard was scratched. Got $100 allowance

   • (Already paid, so got cash back)

4. Jan 20: Took a $3,000 loan for new displays

   • Notes Payable: +$3,000

Sunny’s Liability Summary

Remember This! 💡

The Five Key Ideas

1. Current Liabilities = Debts due within 1 year

2. Accounts Payable = Money owed for buying things on credit (no formal note)

3. Purchase Discounts = Save money by paying early! (Like 2/10, net 30)

4. Purchase Returns & Allowances = Fix problems by returning items or getting price cuts

5. Notes Payable = Formal written promise to pay, usually with interest

The Simple Memory Trick

“If you OWE it, it’s a LIABILITY”

graph TD
    A["You Buy Something"] --> B{How Will You Pay?}
    B --> C["Cash Now"]
    B --> D["Pay Later"]
    D --> E["Informal = Accounts Payable"]
    D --> F["Formal = Notes Payable"]
    E --> G["Maybe get DISCOUNT!"]
    E --> H["Maybe need RETURN!"]

You’ve Got This! 🌟

Now you understand that liabilities aren’t scary — they’re just promises to pay! Every business uses them to:

• Buy inventory before selling it
• Get equipment they need
• Grow bigger and better

The secret? Keep track of what you owe, pay on time (or early for discounts!), and handle problems quickly with returns or allowances.

You’re already thinking like an accountant! 🎉