The Balance Sheet of a company may consist of several account balances. Companies need to classify these balances as either assets, liabilities, or equity. Each of these represents an element of the financial statement. Among these balances, most companies report Accounts Payable balances on their Balance Sheets. However, there’s often a question about whether these balances are debit or credit.
What is Accounts Payable?
The accounts payable is a balance that represents all the obligations of a company. These obligations come as a result of the company’s past transactions with suppliers or creditors. To settle these obligations, the company must pay its creditors in the future. All these characteristics make accounts payable balances a liability for companies.
Companies that purchase goods on credit will have accounts payable balances reported in their Balance Sheets. Usually, accounts payable balances are current liabilities as they represent short-term repayable amounts. However, some balances may also be long-term and, therefore, classified as non-current liabilities.
Is Accounts Payable debit or credit?
Accounts payable balances, due to their nature, are usually credit transactions. When a company acquires goods or services on credit, it must increase its accounts payable balances for the specific supplier. On the other hand, the company must also record the purchase. Since the purchase of goods increases assets (or expenses), the corresponding credit will be accounts payable, which constitutes an increase in liabilities.
As mentioned above, accounts payable is a liability that companies must repay in the future. Due to this characteristic, an increase in accounts payable balances will always be a credit entry. The most common reason for an increase in accounts payable is credit purchases made from suppliers. However, there can also be some other reasons for accounts payable credits, although rare.
Similarly, the reason why accounts payable balances come under current liabilities is that they are credit balances. In the trial balance of a company, the accounts payable balances will always be on the credit side. Therefore, the presentation of these balances on the Balance Sheet will also be in the liabilities part.
On the other hand, accounts payable balances may also decrease due to some transactions, such as repayments to suppliers. In these cases, the company will need to debit its accounts payable balances. The primary sources of debit to accounts payable balances are reimbursements and returns to suppliers.
What is the accounting treatment for Accounts Payable debits and credits?
As mentioned, when a company purchases goods or services from a supplier, the accounts payable account will get credited. It will increase the balance for the specific supplier while also increasing the accounts payable total. The double entry for the transaction is as follows.
|Cr||Supplier account (Accounts payable)|
Similarly, when a company repays the supplier, it will need to reduce the balance. Therefore, the company will use a debit entry to the accounts payable account. The accounting treatment for repayments to suppliers is as follows.
|Dr||Supplier account (Accounts payable)|
|Cr||Cash or Bank|
The accounts payable balances on the Balance Sheet of a company signify amounts owed to suppliers. These balances are a part of the current liabilities on the financial statement. According to their nature, the accounts payable balances of a company are credits. It is because these balances represent liabilities, which are usually credit balances rather than debits.