What happens when a company incurs a late payment fee for failing to pay a bill on time? It depends on the situation.

For example, let's say a company purchased $100 of inventory on credit, and the company debited its Inventory account for $100 and credited Accounts Payable for $100 when it received the inventory. Later, if the company fails to pay its bill on time and incurs a late payment charge of $5, the company should debit Late Payment Expense (an operating expense) and credit Accounts Payable.

But what if the company failed to pay the bill on time because it had lost the original invoice, and the accounting department had thus never made the initial journal entry debiting Inventory and Accounts Payable for $100? In that situation, when the company receives the bill saying it now owes $105 (the original $100 plus the $5 late fee) the company would need to debit Inventory for $100, debit Late Payment Expense for $5, and credit Accounts Payable for $105.
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