Out of all the accounts used in accounting and bookkeeping, accounts payable (AP) is one of the most frequently encountered accounts. However, it creates confusion for the new accounting students, or new businesspeople who are learning to do their books. In particular, some users do not know whether the account is increased with a debit or a credit if it is an account payable.
As you may already know, accounts payable can be classified either as an asset or a liability account in the company’s balance sheet; in this beginner's guide, we will clearly explain to you whether accounts payable is a debit or credit account with some easy-to-understand comparisons.
Accounts payable relate to amounts that your business has agreed to pay for goods and services purchased from other entities like suppliers, contractors, etc. This account falls under the current assets since you will pay these parties in the future for the products or services received.
For instance, if you buy office supplies that cost $5,000 under 30 days' terms of payment, you record $5,000 in accounts payable at the time of delivery of the supplies. This is an account payable, and it will be recorded on your balance sheet even though your supplier is only due $5,000 in 30 days.
As a result, the question that many students ask is: Is Accounts Payable an Asset, Liability, Revenue, or Expense Account?
Accounts payable is a liability account because, generally, you owe money to the suppliers. It is not an equity account because you are not expecting some kind of value or an amount with a vendor in the future. Accounts payable also do not fit anywhere in the revenue or expense classification but fall under the liability portion of the balance sheet.
Current liability accounts usually contain a credit balance, which represents owing to an individual, business, or other organization. They are the opposite of assets – which are economic resources that your business owns.
Accounts payable is increased with credit because it is the account that is used in recording the amount owed to the supplier or vendor by the business.
Now here is an easy way to identify what side of the accounts payable to use, the debited side or the credited side.
Accounts payable is an example of a liability account that indicates that you have a legal obligation to pay someone in the future, and this is why credits are used to record increases in this account. Credits always reduce the equity or liability accounts in the balance sheet. Using the engines of accounts payable is akin to taking a credit to accounts payable, which is similar to taking a loan payable; in effect, you owe more money.
On the other hand, when used to pay for outstanding amounts, it is debited hence the name cash used to reduce accounts payable. Creditors always increase the balance of the liability account.
This debit & credit treatment is the same way applied to all other liability accounts as well To summarize, this discussion, it is important to acknowledge that liability accounts, in general, follow the same debit and credit treatment as this Account Payable. Notes payable, wages payable, and interest payable as part of the current liabilities go up with credit and down with debit.
Here is a simple analogy to help you easily visualize why accounts payable increases with credits:
It is similar to an interest-free loan you have to make to a vendor, where you record the accounts payable as an asset. In other words, if you purchase $1000 of office supplies using this card, then your AP has increased by $1000. It is as good as using a credit card, you do not have to tender cash immediately for those supplies that are bought.
Since credit card balance rises with the new charges, accounts payable also work with the same procedure. High utilization of credit for purchase increases the key formula AP. This means that high liability balances imply more of credits have been applied over a particular period.
I agree that, when you make the entry for credit to accounts payable at the time of purchase, you will also make the entry for debiting an expense account such as Office Supplies Expense. This accurately charges off the cost of using real materials in the operations in the Accounting period.
Thus, for instance, if you have a $1,000 expense on office supplies, the general journal will feature a $1,000 debit to Office Supplies Expense and a $1,000 credit to Accounts Payable when entering those item orders from the vendor.
This is what is commonly referred to as a ‘double entry journal voucher’ whereby the debits and credits are always equal in value.
Debit Credit
Office Supplies Expense $1,000
Accounts Payable $1,000
The subsequent cash payment causes a reduction in the accounts payable liability that was recognized earlier.
It is crucial to understand certain principles or heuristics that should be followed in this process and these include the following:
Here are some handy rules of thumb to help remember the debit vs. credit treatment of accounts payable:
- Accounts Payable is raised with a CREDIT since it is a debt that indicates you have to pay money.
- They are debited at the time of accounting for AP accrual to ensure that the expenses correspond to the supplied or received supplies.
- Cash payments made later for accounts payable that were made earlier are credited because it reduces the accounts payable liability.
Thus in conclusion, when purchases are made on account, it results in crediting of AP. Indeed, the various payments made to discharge those debts resulted in debiting AP. This appears quite logical as it is similar to how one would follow any other borrowing relationship!
The credit balance in accounts payable is virtually always a credit balance since credits increase the standing liability balance and debits decrease it.
The only time that one overpays a supplier is when you have got it wrong with the supplier and he or she is indebted to you. It could also demonstrate a temporary debit balance to the accounts payable until the vendor reimburses your company.
However, in a routine environment, companies have liabilities that they have to pay to important suppliers and contractors, which implies that the accounts payable account keeps a credit balance.
In some cases, small businesses, when using inventory on credit, accrue them to a contra account known as ‘accounts payable – inventory’ instead of the general ‘accounts payable’. This offers a clearer picture of the specific purchases that are still payable, thus eliminating the corresponding amount from ending inventory in the balance sheet.
However, as you can see regardless of which type is used, either accounts payable or a contra inventory account, the debit & credit treatment that we have discussed is valid. Credits help in growing the amount that is still owed to other people by the individuals.
Thus, we expect that this brief discussion has provided quite a clear explanation to anyone interested as to why accounts payable rise with credit entries.
When it comes to AP, it is considered a liability because it is exactly like a debt that your company owes to outside suppliers and contractors for the goods and services they have rendered to the company. Since credit leads to an increase in liabilities, it is conceptually reasonable that its increase through purchasing more items on account would also lead to a corresponding increase in the AP balance.
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