Can Accounts Payable Be A Debit?
Accounts payable also known as AP is a business term used in accounting that represents the total amount of money that a business has to pay to its suppliers of goods and services. Reporting of these obligations on the balance sheet is done based on the current liability since they are often due within a year. However, it is equally possible to have accounts payable appear as a debit entry on the balance sheet. That is why we should have a closer look at what we have so far.
What Is Accounts Payable?
Accounts payable are primarily short-term, which includes the amount owed to suppliers and service providers for the company’s business requirements and that are expected to be paid within 30 to 90 days. Some examples of accounts payable include:
- Again, this involves acquiring inventories from suppliers with agreed payment periods
- These are the services such as legal, accounting, utility services, etc.
- To buy or lease a property, or obtain credit facilities.
When a company purchases credit, this credit is entered in the accounting records through a credit to the accounts payable account. Based on our analysis, it is recommended that supplier invoices should be recorded in the system at the time of receipt and not at the time of payment. It implies that accounts payable are recorded on the credit side of the balance sheet and fall under the current liabilities. Credits increase liability accounts.
Is It Possible That Accounts Payable Is A Debit?
Accounts payable is virtually always a credit balance since it is an amount that you owe to your suppliers. Technically, accounts payable may be credited or may have a debit balance, especially when a company has made an overpayment to a supplier and is entitled to claim the amount back from them.
Here is how that could happen:
1. There is a purchase of office supplies from Vendor XYZ by Company ABC worth $1,000 with net 30-day credit terms.
2. ABC receives an invoice of $1,000 from XYZ so ABC gets charged this by crediting Accounts Payable $1,000 and debiting Office Supplies Expense.
3. Through this scenario, ABC pays the invoice early but in the wrong way sending $ 1,200 instead of $ 1,000.
4. This means that XYZ retains the $ 200 overpayment that remained after paying for the balance owed to ABC.
5. ABC has now received the amount of $300 and the receivable from XYZ for the amount of $200 as they overpaid in the first place.
6. ABC records this with a $200 Accounts Payable and $200 Cash entry on the liabilities and assets side of the equation.
In this example, accounts payable temporally have a debit balance until XYZ pays back the $200 cash overpayment or issues a credit memo to ABC permitting it to decrease the amount that it owes to XYZ on the other invoice.
What is interesting is that other than the overpayment situation, accounts payable should always show as a credit balance because it represents an amount that the company owes to the suppliers in the future and not an amount that the suppliers owe to the company.
The reason debit accounts payable are typically incorrect is as follows.
Another Accounting principle is the matching principle by which expenses should be matched with the revenue in the same period. Accounts payable results from recording expense transactions before cash outflows therefore it is a current liability account. This tally costs to the current period of obligations that have been made.
Monthly carrying of a debit balance in accounts payable is not under the matching principle. It could indicate invoices from suppliers who have not received their money Debit entry getting converted into the next accounting period as prepaid expenses.
As accounts payable is a liability, directly debiting AP also involves violating the normal balance principle concerning balance sheet accounts. Payroll withholdings tax, accrued expenses, and short-term notes payable other current liabilities are often stated with credit balances.
A debit balance in accounts payable could indicate errors like:
- It is also a common mistake made by organizations to fail to record supplier invoices.
- When overpayment occurs without the correct remedial actions
- Grossly placing entries to a wrong general ledger account
- Lack of proper adjustments as one moves from the month-end or year-end.
To avoid the possibility of mistakes that can lead to incorrect debit balances, companies should ensure that there are strong controls over the payables process, the path that the invoices take, the approval processes, and the payments issued.
It also helps to prevent the occurrence of discrepancies, accounting software systems that integrate with automatic three-way match of purchase orders, vendor invoices, as well as payable entries. It balances the price and quantity of all three transaction points before allowing the issuing of invoices. Incorporating this control in payer identification with adequate training assists in preventing circumstances leading to account payable debits.
Other reasons for debiting accounts payable include Following are the other reasons:
While less common, two other valid reasons accounts payable could show a debit balance include:
1. Discounts or Credit Memos – If the company has correctly credited a supplier for returns, early payment discounts, or rebates this will involve a reduction of accounts payable. But an equal debit would be passed to the cash account or back to the original expense account. And so AP nets to the right new payable balance with the use of a formula.
2. Eliminations during Year-End Adjustments –Some organizations offset both the total debit and credit balances at the end of the year by charging any net credit balances to other accounts such as Other Current Assets or Other Income. Net credit balances also shift to such accounts as Accrued Liability or Other Expenses. This clearing-up process could push net debit AP balances to change but all the time, they are balanced by the equal credit clearing accounts.
The Takeaway
Accounts payable serves as a working capital that enables the company to pay cash for operating obligations at a later date. This means AP normally maintains a credit balance or a balance that indicates that money is owed. Accounts payable debits, although may occur once in a while through adjustment entries or correcting entries, generally violate the matching principle, and therefore are an indication that there are posted errors.
Contact us here for Accounts Payable services now!