Is a decrease in accounts payable debit or credit? Debits and credits are the bases upon which the double-entry bookkeeping accounting works, hence understanding whether a decrease in the accounts payable will be recorded as a debit or credit is important for accurate record keeping. When corporate organizations or individuals buy goods or engage the services of individuals or other corporate organizations, they may receive such goods on credit and pay up their suppliers or service providers afterward.
A lot of individuals owe several service providers for services they receive and have to pay for these services at the end of each month. Some of these services include cable TV, electricity, internet, etc. For corporate organizations, when they purchase goods or services on credit, they will record such transactions in an account called the accounts payable; but what do we mean by accounts payable?
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Understanding accounts payable
The accounts payable is an account that keeps track of goods and services that have been purchased on credit and need to be settled within a short time frame. The time frame in which accounts payable need to be settled varies depending on the terms of the purchase contract. Most accounts payable need to be settled within 30 days but some service providers and suppliers may offer a longer time frame that ranges between 60 to 90 days.
Accounts payable are recorded on a company’s balance sheet under the current liabilities segment. This is because the accounts payable indicate that the company owes payments of certain amounts to suppliers or service providers from whom they had received goods or services on credit. Because these payments are due within a year, they qualify as current liabilities.
If a company fails to keep up with the payment terms of the accounts payable, the company is said to have defaulted. This default may bring about dire consequences to the company such as a decrease in their credit score, additional payments such as late fees, disconnection of services, future credit cancelation, etc.
Whenever a company buys goods or services on credit, the balance of the accounts payable increases to indicate that they owe a higher amount. When they pay up part of the money owed to suppliers and service providers, the balance of the accounts payable decreases. In order for us to understand whether a decrease in the accounts payable is a debit or credit, let us discuss how debits and credits affect the accounts payable.
How debits and credits affect the accounts payable
In order to have accurate records for the accounts payable, basic knowledge of how debits and credits affect the accounts payable is necessary. Without understanding how debits and credits affect the accounts payable, it will be impossible to have an accurate financial record of the transactions the company made on credit.
Bookkeepers and accountants use double-entry bookkeeping accounting to accurately record all transactions that go on in the organization. This is important because, for every transaction that occurs, one or more accounts will increase while one or more accounts will decrease. The rule for double-entry bookkeeping accounting is that for every debit made, an equal but opposite entry must be made as a credit. This is done to ensure that at all times, the company’s assets are equal to the sum of its liabilities and equity.
Journal entries are used to record accounting transactions in the company’s financial books with the debits made on the left column of the ledger and credits on the right side of the ledger. However, since most companies additionally use computers and other software to make these same journal entries, debits and credits are made side by side on the same page.
The journal entry for the accounts payable generally involves two accounts with one account being debited and the other being credited. There are instances however where three or more accounts might be necessary to record transactions involving the accounts receivable.
Generally, the accounts payable can be either a debit or a credit depending on whether the journal entry is for a purchase made on credit or for payments made for previous credits. When a company first makes a purchase on credit, it is recorded as a credit to the accounts receivable to indicate an increase in the amount the company owes. When the company pays part of the amount owed, it records the decrease in the amount owed as a debit.
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Is a decrease in accounts payable debit or credit?
A decrease in the accounts payable is a debit and not a credit. This is because a decrease in the accounts payable indicates that the company has settled part of its current liabilities, hence the reduction in liabilities is recorded as a debit to the accounts payable.
The accounts payable can be a debit or a credit depending on the transaction that is being recorded. The accounts payable account is a liability account and like all liability accounts, a decrease in its balance is recorded as a debit while an increase in its balance is recorded as a credit. Liabilities indicate all the company owes to creditors, financial institutions, service providers, or suppliers.
Journal entries for accounts payable
Making journal entries for accounts payable must be done with utmost care and accuracy in order not to mix up payment dates. Timing is essential to accounts payable because they are short-term obligations that have to be paid within a stipulated period. When accounts payable are accurately reported and recorded, it aids the company to easily track its debts to suppliers and service providers. It further helps them to ensure that they make timely and correct payments to their creditors when due.
Failure to accurately record the accounts payable balance could lead to over or underpayment of creditors which can have a negative impact on the company’s reputation and working capital. The journal entry made for accounts payable indicates an increase or a decrease in the accounts payable balance. When a company makes a purchase on credit, it means that they owe the amount of the purchase to the suppliers or service providers. The increase in the amount owed is recorded as a credit to the accounts payable.
For instance, if a logistics company buys delivery bikes costing $120,340 on credit, the company bookkeeper will make a journal entry to record this transaction. The journal entry will be a debit to delivery bikes (long-term assets) and a credit to the accounts payable as seen in the table below:
Journal entry for an increase in the accounts payable
While the logistics company records the transaction as a credit to the accounts payable to indicate an increase in the amount owed to the delivery bike suppliers. The bike suppliers on the other hand will record the transaction as an increase in their accounts receivable to indicate that they will get paid that same amount once the credit is due.
Journal entry for a decrease in accounts payable
Continuing the example above, if the logistics company pays the bike suppliers $50,000 out of the $120,340 they owe, the decrease in the accounts payable will be recorded as a debit to the accounts payable and a credit to the cash account as seen in the following table.
The journal entry above records the decrease in the accounts payable as a debit. The cash account is credited to indicate that there is a decrease of $50,000 in the company’s cash since the payment is made in cash. Subsequent entries for further payments will be recorded in the same way to indicate a further decrease in the accounts payable. If however a lump payment is made that clears all that the company owes at once, then the journal entry will be like the one below:
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Based on our discussions so far, we have seen that a decrease in the accounts payable is a debit and not a credit. This is so because the accounts payable account is classified as a liability on the balance sheet and as such, debits and credits to the accounts payable have the same effects as debits and credits to the liability account.
Like other liabilities accounts, the accounts payable decrease with a debit and increase with a credit. Keeping accurate and timely records of the accounts payable is essential for companies in order to be able to pay their creditors the right amount and at the right time too.