Accounts payable is the balance that needs to be paid to the vendors/suppliers. It’s a credit balance in the balance sheet of the company. Following are some of the basic characteristics of accounts payable.
- This balance is credited to the balance sheet of the business.
- The balance shows money owed to vendors as the business has purchased goods/services on credit.
- It’s a liability in the financial statements of the business.
- It’s a current liability in the balance sheet of the business.
- The increase in accounts payable is recorded as a credit.
- Accounts payable increase when a purchase is made on credit.
- The balance can be used for data capturing and coding. For instance, a party-wise sorting accounts payable ledger can help understand how much is payable.
- The balance is used for invoice reception and categorization.
- The balance is used for invoice verification.
- Generally, an increase in accounts payable leads to lower profit. On the other hand, a decrease in accounts payable is associated with higher profit.
- The accounts payable balance needs to be paid back in a short span of time.
- The accounts payable balance is the opposite of the accounts receivable balance. For instance, accounts payable is a liability. On the other hand, accounts receivable is an asset.
- A payable aging report is used to analyze the party-wise age of the payable balance.
A few more facts are given that help to understand the nature of the accounts payable balance.
Also read, elements of financial statement.
Accounts payable debit or credit
Generally, accounts payable is a credit balance. It’s because the nature of the balance is a liability. It increases with the increase of credit purchases. On the other hand, the payable balance decreases when payment is made for the liability.
Accounts payable journal entry
Following is a journal entry for making a purchase on credit and payable needs to be created.
The debit impact of the transaction is recording purchases. This debit remains the same irrespective of whether the purchase is made in cash or credit. On the other hand, the credit impact of the transaction is a recording of the payable (liability). Once payment is made, the accounts payable balance is debited to be removed from the books. Here is an example,
Accounts payable example
Suppose you buy a car for $15,000 on credit. At the time of purchase, you are required to pay $1,000 as a down payment, and the remaining balance of $14,000 needs to be paid in the next two years. So, the remaining balance of $14,000 is classified as accounts payable balance.
Accounts payable normal balance
The normal balance for accounts payable is a credit balance. The balance is credited if there is an increase in the accounts payable. On the other hand, the balance is decreased via debit.
Increase in accounts payable debit or credit
An increase in accounts payable is a credit; if there is a credit purchase, the payable balance increases. On the other hand, if there are a payment, the accounts payable balance decreases.
Accounts payable is a short-term and credit balance in the company’s financial statement. It’s a balance that needs to be paid by the business.It’s normally a credit balance in the financial statement, if the payment is made to the vendors, the balance of the accounts payable decreases.