Purchases (Cost of Sales) or Accounts Payable (Liability)
Hi there
I am just trying to figure out what is the correct account type to use for certain payments I make.
I run an event management business and for some clients, I invoice them for the full cost of the event and then I am responsible for paying out all suppliers engaged to run the event - venue, entertainment, florist etc.
I am not sure whether for supplier payments I should be using Purchases - Cost of Sales as the account or alternatively Accounts Payable.
Cost of Sales are the direct costs relating to the goods/services you provide to your customers.
Expenses are the running costs of your business, eg, phones, subscriptions, fees.
Liabilities are amounts that your business owes.
When you record a Create bill transaction the amount is automatically posted to the Accounts Payable liability account as this is money the business owes to the supplier. You would select the applicable cost of sales/expense account in the Account allocation field. In accounting, a credit increases a liability and a debit increases a cost of sales/expense account. You can see from the journal created when recording a Bill that both the liability and cost of sale are increased:
When you record the Create supplier payment transaction the Accounts payable liability account is debited, which reduces the liability as this amount is now paid. The bank account is credited which appears as a withdrawal to be matched with the bank transaction:
If you use Items, you would select the applicable cost of sales and expense accounts when creating the Item. The software will automatically record the journal posted to the selected accounts.
I hope that clarifies it for you. Please let me know if you need further help.
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