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Accounts payable in General Journal

OK, long story but interesting (at least to me) as well:

I purchased a business for $110,000. I paid $100,000 cash from my personal bank account, and agreed to pay $10,000 in 6 months plus interest.

For the first transaction, since I had a little accounting knowledge, I created a General Journal entry, debiting "Business purchase valuation" for $110,000 and crediting "owner's equity" for $100,000 and crediting "accounts payable" for $10,000.

Then once a month, when I paid my monthly payments, I created a General journal entry, debiting "accounts payable", debiting "interest expense" and crediting "owner's equity" (I made 6 of these total from personal bank account).

I ended up paying a total interest of $74.

Now, my accounts payable shows a balance of $0, but when I go to reports and select company and financial and select standard balance sheet, I see a balance of -$74 in accounts payable.

Double clicking the report to investigate, I found out that QuickBooks appears to debit the accounts payable account for the total amount paid each time (sum of actual accounts payable amount + interest expense amount, which is equal to the owner's equity line)

After a lot of playing around, I found out that if I create a new "current liability account" and post everything to this new account instead of "accounts payable", the problem with the balance sheet goes away.

I know QuickBooks likes to handle accounts payable through "bills", but what am I missing here? Shouldn't the general journal entry have the same effect in the background any way? Is there some kind of "rule" that I'm not aware of in regards to the way accounts payable is handled in QuickBooks? Could this be a bug?

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Best answer 12-10-2018

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Established Community Backer ***

"That's why I did a general journal entry in the first pl...

"That's why I did a general journal entry in the first place."

Yes, the First JE:

Debit $110,000 for the Asset, which is either the Business (intangible) or Furniture, Fixtures and Inventory?

Credit $100,000 Owner Equity. Credit $10,000 Other Liability.

That is All you ever needed.

"I didn't pay for any of these transactions from the business bank account. So I couldn't click on write a check or create bill,"

If you posted to AP, you did the same thing as a Bill, but manually.

"because I paid for all the above transactions from my personal bank account, which I don't enter in QuickBooks."

Then each payment you made personally is:
Debit Liability
Debit Interest Expense
Credit Owner Equity

As I pointed out, you made a lot of extra entries, and quite a mess to follow. I believe we all have better things to do than run data in circles.

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Established Community Backer ***

"That's why I did a general journal entry in the first pl...

"That's why I did a general journal entry in the first place."

Yes, the First JE:

Debit $110,000 for the Asset, which is either the Business (intangible) or Furniture, Fixtures and Inventory?

Credit $100,000 Owner Equity. Credit $10,000 Other Liability.

That is All you ever needed.

"I didn't pay for any of these transactions from the business bank account. So I couldn't click on write a check or create bill,"

If you posted to AP, you did the same thing as a Bill, but manually.

"because I paid for all the above transactions from my personal bank account, which I don't enter in QuickBooks."

Then each payment you made personally is:
Debit Liability
Debit Interest Expense
Credit Owner Equity

As I pointed out, you made a lot of extra entries, and quite a mess to follow. I believe we all have better things to do than run data in circles.

View solution in original post

Established Community Backer ***

Journal entries should be the exception when using QB, th...

Journal entries should be the exception when using QB, they often do not work as you think they should, and they never work for inventory, when you use inventory type items. It is much better to use the forms on the home page the way QB is designed to be used.

Why this is true, has been a subject of discussion for a long time, with no final answers.

Software is a tool, and like any tool it needs to used within the parameters of its design.  And in QB that means using the forms (bills, invoices, sales receipts, etc etc) provided.  In turn when the form is used QB posts the journal entry behind the scenes.  You can see this entry by having the transaction form on screen and hitting ctrl+Y in desktop

Established Community Backer ***

"For the first transaction, since I had a little accounti...

"For the first transaction, since I had a little accounting knowledge, I created a General Journal entry, debiting "Business purchase valuation" for $110,000 and crediting "owner's equity" for $100,000 and crediting "accounts payable" for $10,000."

The mistake is: this is not AP. It is a different Liability entirely.

"Then once a month, when I paid my monthly payments, I created a General journal entry, debiting "accounts payable", debiting "interest expense" and crediting "owner's equity" (I made 6 of these total from personal bank account)."

That also is a mistake. Your Check or Bill has Splits:

Principal

Interest

And using Equity here also is a mistake. The Credit would be "payment from Checking."

This happens Behind the scenes of the Payment Transaction: Debit Liability, Debit expense, Credit Bank

"I ended up paying a total interest of $74.

Now, my accounts payable shows a balance of $0, but when I go to reports and select company and financial and select standard balance sheet, I see a balance of -$74 in accounts payable."

Man, you have made this very difficult. The program is really basis. When you are in debt, you pay it using Check, or credit card, or a Bill to pay later. The Bill already IS AP. That is why you don't post to AP manually or directly.

"Double clicking the report to investigate, I found out that QuickBooks appears to debit the accounts payable account for the total amount paid each time (sum of actual accounts payable amount + interest expense amount, which is equal to the owner's equity line)"

That's because all of this is wrong.

"After a lot of playing around, I found out that if I create a new "current liability account" and post everything to this new account instead of "accounts payable", the problem with the balance sheet goes away."

You should never post any of this to AP.

"I know QuickBooks likes to handle accounts payable through "bills", but what am I missing here?"

You are running the data in circles.

"Shouldn't the general journal entry have the same effect in the background any way?"

Nope.

"Is there some kind of "rule" that I'm not aware of in regards to the way accounts payable is handled in QuickBooks? Could this be a bug?"

The rule is, Never use JE for AP, AR, Credit Cards, Payroll, Sales Taxes and Inventory.

You bought a program with an Interface = tools.

AP = Enter bill.

But this debt is not AP, anyway. That was the first error. It is a different Liability.


Established Community Backer ***

Oh, sorry: Your initial entry: Debit Other Asset for the...

Oh, sorry:

Your initial entry:

Debit Other Asset for the Purchase of $110,000; Credit Owner Equity for $100,000 and Credit Other Liability for $10,000.

Write Check:

Splits to Loan as Principal and to Interest as Expense.

Done.

Not applicable

Thank you so much for your reply. I didn't pay for any of...

Thank you so much for your reply. I didn't pay for any of these transactions from the business bank account. So I couldn't click on write a check or create bill, because I paid for all the above transactions from my personal bank account, which I don't enter in QuickBooks. That's why I did a general journal entry in the first place.
Established Community Backer ***

Too late for you, but maybe not others, I suggest your fi...

Too late for you, but maybe not others, I suggest your first accounting entry should be when you take money from personal bank account and put into business.  The entry is debit cash and credit equity. Boom!  No you can start proper accounting and avoid the mess above.
Established Community Backer ***

"The entry is debit cash and credit equity" I think you m...

"The entry is debit cash and credit equity"
I think you mean "Use a Bank type of account for Petty cash and Make a Deposit entry to that account."
Established Community Backer ***

Petty cash?  I don't recall that being part of this. In t...

Petty cash?  I don't recall that being part of this. In this example, I am saying he should have moved the $100k from his personal bank account to start business bank account (at the actual bank on the corner).  Then in QB, the accounting entry would ultimately be a debit to Cash account (which QB calls "Bank"). Yes, record a bank deposit (cash receipt) to debit (increase) that cash/bank account and credit equity. Not sure where he got the Business Valuation account, assume it is a QB default account somehwere.
Established Community Backer ***

If you had the forethought to Move the money physically,...

If you had the forethought to Move the money physically, sure. Otherwise, you didn't Move it, but you want to track the Spending. And a Deposit is not "debit this credit that." It does this behind the scenes, but all of the programs and products have Deposit as a Functional Screen and tool.
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Established Community Backer ***

Yes, forethought would be good.  Hopefully we can provide...

Yes, forethought would be good.  Hopefully we can provide that to some people here to help them, tho I cannot say I did that myself either.  I opened my first biz bank account with a stack of customer checks.  Yes, I know that QB hides the debits and the credits, but once you execute the proper QB function such as a Deposit, you can always check the end result of debits and credits are correct in General Ledger as is universal in any accounting system or by clicking Transaction Jounral while in the entry, as you know.
clu
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Re: Yes, forethought would be good. Hopefully we can provide...

Here is another question:

One company gave cash to Second Company (Transfer of bank funds from one company bank account to another company bank account.)

The bank transfer sent by the 1st Company shall be used to only pay invoices and not to be used as cash by 1st company.

This is what I have done thus far:

From the registered, I deposited the $10k and charged the item as a loan.  This is an incorrect entry.

Please help!!!!!

 

 

Established Community Backer ***

Re: Yes, forethought would be good. Hopefully we can provide...

This is Moot: "The bank transfer sent by the 1st Company shall be used to only pay invoices and not to be used as cash by 1st company."

 

For the Accounting, it is In The Bank. Period. You do not mark it as "only to pay invoices."

 

"This is what I have done thus far:

From the registered, I deposited the $10k and charged the item as a loan.  This is an incorrect entry."

 

That is Exactly Right; if someone loaned the entity Funds and the entity will need to repay them = Loan.

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