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Direct Method: Cash Paid to Suppliers

Brian Krogol
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So when we talk about cash paid to suppliers it can be a little trickier. There's gonna be two relevant T accounts. We're gonna have to think about inventory as well as accounts payable. Ap. Okay so let's make t accounts for both inventory and accounts payable. Give it more space. Okay inventory and accounts payable. So we're gonna have some beginning balance in inventory. And then we're gonna be making purchases right? We're gonna purchase more inventory and then that would increase our inventory balance when we purchase some. What would decrease our inventory balance when we sell the inventory. Right? And it goes to cost of goods sold. So that would get rid of some of our inventory. And we would be left with our ending balance in inventory. Now what about the accounts payable side? We would have some beginning balance and it says a credit right? Because this is a liability. And what would increase our accounts payable when we purchase stuff? Right. So we can assume in this lesson that we're gonna purchase everything on credit and pay them later. So we'll have our purchases here and that's gonna increase our accounts payable. Right? We're gonna purchase uh more inventory. We're making a couple assumptions first that we're just purchasing inventory in Ap and we're also assuming that we're putting all our purchase none of our purchases are in cash. Now you can make that assumption anyways even if we pay in cash immediately. Well maybe for a millisecond. Right we owe them an account payable and then we pay them in cash. Right So it can it can all flow here through accounts payable. All our purchases can be increases to our accounts payable. And how do we decrease our accounts payable with that cash paid? Right when we pay them in cash, that's going to decrease our accounts payable and then where we left with our ending balance. So notice the cash paid to our suppliers is the important part of this journal entry right here. Now. Why would we need to use both of these balances? Well they could make the question really tricky by talking about inventory. They could give you the beginning balance of inventory. The ending balance of inventory. They could tell you cogs and you'd have to figure out purchases and then with that purchases number you would have to bring that purchases number over into your ap because those are gonna be the same number and then you'd have to use your beginning and ending balances from ap as well as the purchases to figure out the cash paid. Okay so it can be a little trickier here but they would have to give you all that information if they're talking about the direct method and they're giving you inventory numbers, accounts payable numbers, chances are you're gonna have to figure out these purchases to back into the cash paid to suppliers. Alright let's go ahead and in the next video we'll talk about cash paid for operating