Are Accounts Payable Debit or Credit?
Learn the correct classification and accounting treatment of Accounts Payable, a key liability, for accurate financial record-keeping.
Accounts Payable (AP) represents the money a company owes to its suppliers for goods or services purchased on credit. This financial obligation arises when a business receives items or services but defers payment within a short period. Understanding and managing Accounts Payable is fundamental for accurate financial record-keeping, reflecting a business’s short-term financial commitments and ensuring its financial health.
Understanding Debits and Credits
The foundation of financial record-keeping lies in the double-entry accounting system, which utilizes debits and credits. A debit is an entry recorded on the left side of an account, while a credit is an entry on the right side. These terms do not inherently mean increase or decrease; their effect depends on the specific type of account involved.
Each account type has a “normal balance,” the side (debit or credit) where an increase is recorded. Assets and expenses have a normal debit balance, meaning a debit increases them and a credit decreases them. Conversely, liabilities, equity, and revenues have a normal credit balance, where a credit increases them and a debit decreases them. All financial transactions affect at least two accounts, with total debits always equaling total credits to maintain the accounting equation’s balance.
Accounts Payable and the Accounting Equation
Accounts Payable is a liability account, representing obligations owed by a company to external parties. This classification links Accounts Payable to the fundamental accounting equation: Assets = Liabilities + Equity. This equation must always remain balanced, showing that a company’s resources are funded by what it owes or by its owners’ investment.
As a liability, Accounts Payable has a normal credit balance. When a company incurs a new obligation, such as purchasing supplies on credit, the Accounts Payable account increases with a credit entry. Conversely, when the company reduces its obligation by making a payment, the Accounts Payable account decreases with a debit entry.
Recording Accounts Payable Transactions
Recording Accounts Payable transactions applies debit and credit principles to reflect changes in a company’s obligations. When a business purchases goods or services on credit, it incurs an expense or acquires an asset, increasing its Accounts Payable. This requires a debit to the relevant expense or asset account and a corresponding credit to Accounts Payable. For instance, buying $500 worth of office supplies on credit involves a debit to Office Supplies Expense for $500 and a credit to Accounts Payable for $500.
When the company pays its outstanding Accounts Payable, the obligation decreases, and its cash balance also decreases. This payment is recorded with a debit to the Accounts Payable account and a credit to the Cash account. For example, if the company pays the $500 owed for the office supplies, the journal entry would be a debit to Accounts Payable for $500 and a credit to Cash for $500. This reduces both the liability and the asset, ensuring the books remain balanced.