What Is a “Due to” Account?
A “due to” account is a liability account—commonly called accounts payable—used in the general ledger to record amounts a company owes to another party. It shows obligations for goods or services received that have not yet been paid. A corresponding “due from” account is the opposite: an asset account reflecting amounts others owe to the company.
Key takeaways
– “Due to” = liability for amounts payable (often called accounts payable or intercompany payables).
– “Due from” = asset for amounts receivable.
– Record a “due to” when you receive goods/services on credit or recognize an accrual.
– Clear the “due to” when the invoice is paid (debit the liability; credit cash).
– A negative balance in either account generally indicates a posting error and should be investigated.
Source: Investopedia (Paige McLaughlin) — https://www.investopedia.com/terms/d/due-to-account.asp
How a “Due to” Account Works
– Trigger: The company receives goods or services but does not pay immediately (vendor invoice or intercompany charge).
– Recording: The business creates an entry to set aside the payable amount until payment occurs.
– Reconciliation: The due to account is reconciled against vendor invoices/statements and the corresponding due from account when intercompany transactions exist.
– Movements: An increase in due to indicates more purchasing on credit; a decrease indicates cash payments reducing outstanding payables.
Due to vs. Due from
– Due to (liability): Money you owe to others; recorded as credits in the ledger.
– Due from (asset): Money others owe you; recorded as debits.
– They often appear together for intercompany transactions or fund transfers to reconcile which entity owes which.
– Neither should normally have a negative balance—if they do, investigate posting mistakes, double payments, or misapplied credits.
Journal entries — typical flows (simple examples)
1) Invoice received for expense (on account)
– Debit: Expense (or Inventory/Asset) $1,000
– Credit: Due to (Accounts Payable) $1,000
2) Invoice paid
– Debit: Due to (Accounts Payable) $1,000
– Credit: Cash/Bank $1,000
3) Accrued expense at period end (no invoice yet)
– Debit: Expense $500
– Credit: Due to (Accrued Liabilities) $500
4) Vendor issues credit memo (reduces payable)
– Debit: Due to (Accounts Payable) $200
– Credit: Expense or Inventory $200
Practical step-by-step: recording and managing a due to account
1. Receive invoice or document obligation
– Verify goods/services received and match to purchase order/receiving report.
2. Enter the invoice into accounts payable
– Capture vendor, invoice number, date, due date, amounts, and GL coding.
3. Approve and schedule payment
– Follow authorization policies (approvals, thresholds).
4. Reconcile vendor statements monthly
– Match outstanding ledger payables to vendor-supplied statements, note disputed items.
5. Post payments
– When paid, post debit to the due to account and credit cash/bank.
6. Clear the payable and retain documentation
– File invoices, approvals, and proof of payment for audit and tax purposes.
7. Adjust and correct errors promptly
– If a negative balance occurs or entries are misclassified, investigate and post corrective journal entries.
Example (numeric) — XYZ Company scenario
– Situation: A replacement tuner invoice = $3,200; mechanic invoice = $450.
– When invoices received:
– Debit: Repairs & Maintenance (or Equipment if capitalizable) $3,200
– Credit: Due to (Accounts Payable) $3,200
– Debit: Labor Expense $450
– Credit: Due to (Accounts Payable) $450
– When XYZ pays both invoices ($3,650 total):
– Debit: Due to $3,650
– Credit: Cash/Bank $3,650
– After payment, the due to balances for those invoices are cleared.
Month-end and reconciliation checklist
– Prepare an accounts payable aging report.
– Reconcile the general ledger due to balance to the AP subledger.
– Match vendor statements to open invoices; follow up on discrepancies.
– Accrue for received services without invoices.
– Ensure proper cut-off (exclude next-period invoices).
– Investigate any negative balances immediately.
Common errors and how to correct them
– Duplicate invoice entry or duplicate payment: reverse duplicate entry or request vendor refund/credit.
– Misapplied payment: reclassify payment to the correct vendor/invoice.
– Negative due to balance (asset-like balance): investigate—may be a prepaid, credit memo, or posting error—and reverse or adjust entries.
– Missing accruals: post accrual journal entries to reflect incurred-but-not-invoiced liabilities.
Internal controls and best practices
– Segregation of duties: separate invoice recording, approval, and payment functions.
– Three-way match: purchase order, receiving report, invoice.
– Approval workflows with delegated limits.
– Timely vendor reconciliations and dispute resolution.
– Centralize intercompany settlements or use netting procedures and clear policies for intercompany invoicing.
– Use AP automation or ERP systems to reduce manual errors.
Impact on financial statements and ratios
– Balance sheet: due to accounts appear in current liabilities; higher balances raise current liabilities.
– Cash flow: paying down due to reduces operating cash; increasing due to preserves cash in the short term.
– Ratios affected: current ratio (current assets / current liabilities), quick ratio, days payable outstanding (DPO). Rising due to may increase DPO, indicating slower cash conversion or more credit use.
Intercompany payables
– Often labeled “intercompany payables” (due to) and “intercompany receivables” (due from).
– Require regular reconciliation between legal entities to eliminate intercompany balances in consolidated financials.
– Implement clear policies for transfer pricing, invoicing, currency conversion, and netting.
When to be concerned
– Rapid, sustained increases in due to without matching growth in purchasing or planned financing can signal cash flow strain.
– A large number of disputes/unreconciled items may indicate weak controls or vendor management issues.
– Consistent negative balances or unexplained reversals suggest accounting errors needing remediation.
Conclusion
A due to account is a core liability account used to track amounts a company owes. Proper recording, timely reconciliation, strong internal controls, and clear intercompany processes keep payables accurate and prevent overstating liabilities or masking cash-flow issues. Regular review of aging, approvals, and automated workflows will reduce errors and improve working capital management.
Source
– Investopedia, “Due to Account,” Paige McLaughlin: https://www.investopedia.com/terms/d/due-to-account.asp
(Continuing from the XYZ Company example)
Once the invoices were paid, the due to accounts would be canceled. In practice, companies maintain processes and controls to accurately record, monitor, and settle due to accounts so that their financial statements reflect correct liabilities and cash flows.
Additional sections
How Due to Accounts Appear on Financial Statements
– Balance sheet: Due to accounts are current liabilities (unless explicitly long-term) and appear in the liabilities section, commonly grouped under “Accounts payable,” “Accrued liabilities,” or “Intercompany payables.”
– Income statement: The expense related to the underlying purchase (e.g., repairs, inventory purchases, services) appears on the income statement when the expense is incurred; the due to account is the corresponding liability on the balance sheet.
– Cash flow statement: When the payable is paid, it appears as a cash outflow from operating activities (for operating payables) or financing/investing activities if related to non-operating items.
Journal-entry examples (practical, step-by-step)
1) Standard purchase on credit (vendor invoice for parts)
– When goods/invoice received:
– Debit Inventory (or Repair Expense) $5,000
– Credit Due to (Accounts Payable) $5,000
– When invoice is paid:
– Debit Due to (Accounts Payable) $5,000
– Credit Cash/Bank $5,000
2) Accrued expense (service provided but invoice not yet received)
– At period-end to record accrued liability:
– Debit Maintenance Expense $1,200
– Credit Due to (Accrued Liabilities) $1,200
– When invoice arrives and is paid:
– Debit Due to (Accrued Liabilities) $1,200
– Credit Cash/Bank $1,200
3) Intercompany payable between subsidiaries A and B
– Subsidiary A (owes money to B) records:
– Debit Expense/Asset $10,000
– Credit Due to Intercompany $10,000
– Subsidiary B (is owed money) records:
– Debit Due from Intercompany $10,000
– Credit Revenue/Receivable $10,000
– When payment/netting occurs:
– Debit Due to Intercompany $10,000
– Credit Cash/Bank $10,000
– (And corresponding entry in Subsidiary B)
Common analytics and metrics influenced by due to accounts
– Current ratio (Current assets / Current liabilities): Increasing due to balances reduces the current ratio, indicating more short-term obligations.
– Quick ratio: Similar impact as current ratio (if inventory not part of quick assets).
– Days Payable Outstanding (DPO): Measures how long a company takes to pay suppliers. DPO = (Average Accounts Payable / Cost of Goods Sold) × Days in period. Rising due to balances can increase DPO (longer payment cycle), which may be strategic or signal liquidity stress.
Practical steps to manage due to accounts (checklist)
1. Record promptly
– Post invoices or accruals as soon as goods/services are received or legal obligation arises.
2. Implement three-way matching
– Match purchase order, goods receipt (or service completion), and vendor invoice before approving payment.
3. Maintain an AP aging schedule
– Track payables by age buckets (current, 30, 60, 90+ days) to prioritize payments and identify disputes or delinquent items.
4. Reconcile regularly
– Monthly reconcile the general ledger due to balances to vendor statements and subsidiary due from balances (for intercompany).
5. Approvals and segregation of duties
– Require manager or procurement sign-off before invoice approval; separate invoice recording from payment authorization.
6. Use netting for intercompany balances
– Where multiple cross-charges exist, consider periodic netting to reduce payment volume and FX exposure.
7. Monitor KPIs
– Track DPO, average payable days, and supplier concentration risk.
8. Period-end accruals
– Accrue for goods/services received but not invoiced to avoid understating liabilities.
9. Address negative balances quickly
– Negative balances in due to or due from accounts usually indicate mispostings; investigate and correct via adjusting entries or reclassifications.
How to handle errors and negative balances
– If a due to account shows a negative balance (i.e., appears as a debit), this often means:
– An overpayment occurred and should be recorded as a prepaid expense or receivable from the vendor, or
– A misposting (e.g., payment recorded to wrong supplier or wrong ledger account) occurred.
– Remedial steps:
1. Trace transactions causing the negative balance (payments, credit memos, returns).
2. Reclassify legitimate overpayments to an asset account (vendor prepayments) or correct the incorrect posting.
3. Communicate with the vendor if a refund or credit is needed.
4. Document corrections and maintain supporting evidence.
Intercompany-specific considerations
– Due to / due from pairs should reconcile across subsidiaries: the payables recorded by one entity should match receivables recorded by the counterparty (subject to timing and currency differences).
– Centralized treasury or intercompany netting can reduce multiple payments and FX costs.
– Transfer pricing and tax implications: intercompany charges must conform to arm’s-length policies and be supported by documentation.
Examples of practical scenarios
Example A — Rising due to balances (what it may mean)
– Situation: Company’s due to increased from $200,000 to $350,000 over three months.
– Possible interpretations:
– Company is purchasing more on credit to preserve cash (intentional working-capital management).
– Company is experiencing cash-flow stress and delaying payments (warning sign).
– There may be more purchases due to seasonality (normal business cycle).
– Action steps:
– Review aging schedule, supplier concentration, and payment terms.
– Contact key suppliers if payment terms need renegotiation.
– Forecast cash flow and determine if short-term financing is required.
Example B — Intercompany netting to simplify settlements
– Two subsidiaries A and B owe each other: A owes B $120,000; B owes A $85,000. Instead of processing both payments, perform a netting:
– Net payable from A to B = $35,000.
– Reduce transaction volume and bank fees by settling only the net amount.
– Accounting: Each entity records the net settlement and adjusts due to / due from accordingly.
Year-end and audit considerations
– Ensure all received goods/services as of year-end are accrued if invoices are not yet received.
– Confirm major vendor balances with supplier statements (supplier confirmations are a common audit procedure).
– For intercompany balances, perform reconciliations and obtain counterparty confirmations.
– Disclose significant short-term obligations if they materially affect liquidity.
Best practices summary
– Timely and accurate recording: Record payables at the time of obligation, not when the invoice arrives (use accruals).
– Strong internal controls: Use three-way matching, segregation of duties, and approval hierarchies.
– Regular reconciliation: Monthly reconciliations to vendor statements and intercompany matching avoid surprises and audit problems.
– Clear policies: Maintain vendor onboarding, payment terms, and dispute-resolution guidelines.
– Monitor and analyze: Use aging schedules, ratio analysis, and DPO to manage working capital and supplier relationships.
Concluding summary
A “due to” account (commonly accounts payable or intercompany payables) is a fundamental liability account that represents amounts owed to suppliers, vendors, or related entities. Properly recording and managing these accounts ensures accurate financial reporting, effective working-capital management, compliant intercompany activity, and smoother audit processes. Practical steps—timely accounting entries, three‑way matching, regular reconciliations, aging analysis, and strong internal controls—help companies avoid errors (such as negative balances), maintain supplier relationships, and preserve liquidity. For more detail on the basic definition and role of due to accounts, see Investopedia’s explanation.1
Sources
1) “Due to Account.” Investopedia. https://www.investopedia.com/terms/d/due-to-account.asp
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