A due to account is a liability account typically found inside the general ledger that indicates the amount of funds payable to another party. The funds can be currently due or due at a point in the future. This due to account is usually generated and recorded as a result of a transaction.
After a business receives goods or services from an external party, if the service provider is not paid immediately, a due to account is created. Funds are allocated to this account for future payment. The due to account works alongside a due from account to reconcile which account the money will come from and where it will be sent.
The due to account is also commonly known as accounts payable.
Key Takeaways
- The due to account, also referred to as accounts payable, is a liability account in the general ledger that indicates the amount of funds owed to other entities.
- Businesses utilize the due to accounts section of the ledger to appropriately track monetary obligations owed to external parties.
- It is crucial for companies to diligently monitor their due to accounts to avoid excessive debt accumulation.
Understanding Due to Accounts
The general ledger is the centralized record that encompasses all financial accounts for a business, including debit and credit accounts. The due to account can also be termed an “intercompany payables” account. When a business receives goods or services but does not pay for them immediately, a due to account entry is created to earmark funds for vendor payment.
An increase in a due to account balance over a prior period suggests that the company is purchasing more goods or services on credit rather than paying in cash. Conversely, a decrease in a due to account indicates that the company is settling its previous debts at a faster rate than it acquires new ones on credit. Maintaining accurate tracking of due to accounts is essential to prevent a company from becoming overleveraged.
Due to Account vs. Due from Account
The due to account and the due from account are fundamentally opposite. While the due to account tracks the sums a business owes to various entities, the due from account is an asset account in the general ledger used to monitor money owed to the business that is held by another firm. Neither account should ever have a negative balance, as such a scenario would indicate an accounting error.
Example of a Due to Account
Consider XYZ Company, which manufactures widget presses. One day, their widget press malfunctions due to a defective tuner in one of the crankshafts. XYZ Company needs to hire a mechanic to fix the widget press and also purchase a new tuner. They receive an invoice for the tuner, and the mechanic will send an invoice later for his services. XYZ Company would create two due to accounts in its general ledger upon receiving these invoices. These due to accounts would be nullified once the invoices are paid.
Related Terms: due from account, accounts payable, general ledger, overleveraged, debit.
