Introduction of Accounts Payable Credit or Debit
The account payable can be defined as the amount that the business owes to its suppliers, as well as customers and creditors and generally is classified as a liability account. Therefore, whenever a business purchases items on credit, it would increase the value in account payable and hence the account payable would be credited. However, when the business repays the payable amount, it decreases the account payable account and there would be a debit in the account payable account.
Why is Accounts Payable Credit or Debit?
As a general accounting principle, it is to be noted that whenever there is increase xin the asset account, increase in expense account and decrease in the liability account, decrease in accounts of revenue and equity, then such entries would be recorded as a debit. Similarly, as a general accounting principle, it is to be noted that whenever there is decrease in the asset account, decrease in expense account and increase in the liability account, increase in accounts of revenue and equity, then such entries would be recorded as a credit.
Therefore, account payable is regarded as a liability account and any increase to the amount of account liability would be credited and any decrease to the amount of the accounting liability would be debited. Hence, whenever a business buys items or raw materials from the suppliers and creditors on credit, the business owes them the corresponding amount and this would increase the balance of the account payables wherein to record such transactions, there would be a credit to the account payable liability account. Similarly, whenever a business repays the amount owed on purchasing items or raw materials from the suppliers and creditors on credit, the business has paid the corresponding liability and the corresponding amount would be reduced to decrease the balance of the account payables wherein to record such transactions, there would be a debit to the account payable liability account. This is the broad reason that why account payable is a credit or debit. It is purely a recording of transactions happening in line with the account.
Examples of Accounts Payable Credit or Debit
Following are the examples are given below:
Example #1
Let us take the example of ABC company. The ABC company has approached the supplier to take up some raw materials on credit. The raw materials would be worth of $1,000 as cost to the business. The business commits to return the amount to the supplier in the time line of one month.
Please help the management to record the journal entry of account payable.
Solution:
The entry for the journal would be posted as follows:
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The business went back to the supplier after one month. It paid back the supplier account payable worth $1,000 in cash. This would result in the decrease of account payable for the business as the business has paid off his dues or liable amount to the supplier in time without any penalty or interest. Help the management prepare the account payable entry.
Solution:
The entry for the journal would be posted as follows:
Example #2
Let us take the example of PQR company. The PQR company has approached the supplier to take up some raw materials on credit. The raw materials would be worth of $2,500 as cost to the business. The business commits to return the amount to the supplier in the time line of one month.
Please help the management to record the journal entry of account payable.
Solution:
The entry for the journal would be posted as follows:
The business went back to the supplier after one month. It paid back the supplier account payable worth $1,000 in cash. This would result in the decrease of account payable for the business as the business has paid off his dues or liable amount to the supplier in time without any penalty or interest. Help the management prepare the account payable entry.
Solution:
The entry for the journal would be posted as follows:
Recording of Accounts Payable Credit or Debit
In order to record account payable as either credit or debit, there would be proper recording by creating journals. The format of account payable journal entry when there is a credit entry would be as follows:
Similarly, the format of the account payable journal entry when there is debit entry is as follows:
Normally, when supplies are purchased by the business from either the supplier or the vendor, the vendor or the supplier would issue invoices. These invoices are termed as vendor invoices. They would get credit corresponding to the account payable account. On issuance of the vendor invoice, a corresponding debit entry would go either into the asset account or an expense account. The expense account could range from advertising expense, rent expense and repairs or maintenance expense account. Similarly, an asset account would be composed of prepaid asset such as prepaid expenses, prepaid insurance, fixed assets such as fixtures, vehicles and equipment.
Whenever, the business pays backs to the vendor, it would result in decrease in the account payable account which in turn would result in debit in the account payable account. Once the account payable is debited, there would be a corresponding credit to the cash account.
Conclusion
The account payable is a liability account wherein it accounts for the amount that business generally owes from its suppliers. The suppliers are individuals who may sell the raw materials to the business on credit. Any increase in the account payable account would be recorded as the credit in the account payables and any decrease in the account payable account would be signified as a debit. Whenever there is a decrease in the account payable, it signifies that the business has paid its dues to the suppliers. Similarly, an increase in the account payable would signify an increase in the amount payable to the supplier and the amount owed by the business. It is to be further noted that the account payable and trade payable are used in correspondence to one another but basis the situations, the treatment may differ.
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