Week 6 – Answer Key: Accounts Payable (AP)

Concept 1

Role of Accounts Payable — Answer Key

Accounts Payable (AP) represents amounts owed to vendors for goods and services already received. AP is a current liability and directly affects cash flow, vendor relationships, and the accuracy of financial statements.

A well-run AP function ensures invoices are recorded correctly, paid on time, and that liabilities are fully reflected in the general ledger.

Concept 2

Vendor Setup & 1099 Classification — Answer Key

Critical vendor record fields:

Legal name / DBA, address, contact information.
Taxpayer Identification Number (EIN/SSN) from Form W-9.
Default payment terms and payment method.
Default expense or GL account coding.
1099 flag and income type for service-type vendors.

Sample 1099 classification (simplified):

Solo IT consultant (sole proprietor) → 1099: Yes.
Large office supply corporation → 1099: No.
Freelance graphic designer (single-member LLC) → 1099: Yes.
Utility company (corporation) → 1099: No.

Concept 3

Three-Way Match & AP Cycle — Answer Key

Example: PO for 10 monitors @ 150 = 1,500; 10 received; invoice shows 1,500 + 50 freight = 1,550.

Three-way match confirms:

Quantity matches.
Unit price matches the PO.
Freight is acceptable per company policy.

Journal entry:

Computer Equipment (or Office Equipment) .... Dr 1,500
Freight-In (or Shipping Expense) ............ Dr   50
    Accounts Payable – Vendor XYZ ............... 1,550

Students may combine amounts into one expense or asset account in basic courses, but the instructor solution shows recommended detail.

Concept 4

Recording Vendor Bills & Payments — Answer Key

A. Record Vendor Invoice

Invoice: Monthly cleaning services from Cleaning Co., 600, terms Net 30.

Jan 31
Cleaning Expense ............................ Dr 600
    Accounts Payable – Cleaning Co. ............ 600

B. Record Payment of Invoice

Payment: Check to Cleaning Co. on Feb 20 for 600.

Feb 20
Accounts Payable – Cleaning Co. ............ Dr 600
    Cash ......................................... 600

The key concept is that AP is debited (reduced) when the vendor is paid and Cash is credited.

Concept 5

AP Subsidiary Ledger & Aging — Answer Key

Sample Vendor Ledger — Office Depot

Date	Description	Debit	Credit	Balance
Feb 1	Invoice #9854	420		420
Feb 10	Payment Chk #112		200	220
Feb 25	Invoice #9910	180		400

Ending Office Depot balance: 400.

Sample AP Aging (Excerpt)

Vendor	Current	1–30	31–60	61–90	Total
Office Depot	400	0	0	0	400
Cleaning Co.	0	600	0	0	600
Tech Services	0	0	1,200	0	1,200
Freight Inc.	0	0	0	350	350

The total of all vendor balances should reconcile to the Accounts Payable control account in the general ledger. Past-due invoices appear in the 31–60, 61–90, and 90+ day columns.

Concept 6

Payment Terms & Early Payment Discounts — Answer Key

Scenario: Invoice for 5,000, terms 2/10, Net 30.

Discount = 2% × 5,000 = 100
Amount to pay within discount period = 4,900

Payment entry if discount is taken:

Accounts Payable – Vendor .............. Dr 5,000
    Cash ........................................ 4,900
    Purchase Discounts (or AP Discounts) ......... 100

Students should show that the full liability is cleared, while the business benefits from a discount that reduces the cost of the purchase.

Concept 7

AP Internal Controls & Fraud Risks — Answer Key

Key controls:

Segregation of duties between requesting, approving, and paying.
Three-way match (PO, receiving report, invoice) before payment.
Formal vendor approval process to prevent fake vendors.
Secure storage of check stock and online banking credentials.
Dual signatures on large checks or payments.
Regular AP aging review and reconciliation to vendor statements.

Risks if controls are weak:

Payments to fake or duplicate vendors.
Duplicate or unauthorized payments.
Unrecorded liabilities or misstated expenses.
Damaged vendor relationships due to chronic late payments.

Homework

Homework & Activity Solutions — Summary

Vendor Setup & 1099 Flagging: Students should correctly identify basic 1099-eligible vendors, choose reasonable GL accounts (e.g., Legal Expense, Consulting, Office Supplies), and assign standard terms.

Recording Vendor Bills: Each invoice should be recorded with the correct expense or asset debit and a credit to the appropriate vendor in AP, with sales tax and freight treated according to provided instructions.

AP Aging & Payment Plan: Students should prioritize overdue invoices and critical vendors, explain how limited cash is allocated, and consider early payment discounts where beneficial.

Discussion

Discussion Prompt — Model Answer

The AP function influences both cash flow and vendor relationships. Delaying payments too long may preserve cash in the short term but can damage relationships, result in late fees, and cause vendors to tighten credit terms. On the other hand, paying too early can create cash shortages.

If AP is poorly managed, companies may experience duplicate payments, missed or late payments, incorrect AP balances, and incomplete 1099 information. These problems can lead to vendor distrust, audit issues, penalties, and unreliable financial statements.

Summary

Week 6 Summary — Instructor Version

By the end of Week 6, students should be able to set up vendors, record AP transactions from PO to payment, maintain AP ledgers and aging, evaluate payment timing and discounts, and understand core AP internal controls and fraud risks. These skills are central to managing a healthy payables process in any organization.

Next topic: Accounts Receivable & the Revenue Cycle, completing the picture of working capital management.