Is Accounts Payable A Debit Or Credit?

Helen, a manager at ABC Company recently had a debate with her peers regarding the classification of the accounts payable either as a debit or as a credit.

Accounts payable is one of the most common accounts encountered in accounting and bookkeeping services. It raises several issues particularly where small business people and students in accounting are trying to understand whether accounts payable is a debit or a credit. Let's break it down.

What is Accounts Payable?

Accounts payable represents the amount of money that the business owes to other businesses, for products or services acquired but not yet paid for. Common examples of accounts payable liabilities include:

- Inventory purchases
- Supplies
- Equipment and machinery
- Utility bills
- Rent
- Contractor service fees

In other words, AP is the amount that needs to be paid within one year as it reflects short-term liabilities, which must be settled in the coming year. It is reported in the balance sheet as a liability as it implies that you have a debt that is not within the confines of the business.

There is always a contention whether Accounts Payable is an asset or a liability.

It is almost universally the case that an accounts payable is a liability account. This makes it have a normal credit balance and an account has a debit balance if overpaid. It can be defined as “money which the company has received for products sold or services rendered and is yet to pay to others” and this makes it a liability.

The only circumstance where it would be appropriate to record an account payable at a value more than the associated account receivable is when a Accounting Company pays an account payable at an amount that is higher than the face value of the note receivable. This could sometimes give rise to a debit balance for a while and on the balance sheet, this will show that the vendor now holds a credit balance with your business. However, Accounts Payable on the balance sheet that have been carried out for some time are on the credit side.

Accounts Payable Journal Entries

There are two main types of journal entries related to accounts payable:

1. When Inventory or Expenses are Recorded:

Debit – expense or inventory asset: this indicates that the accounting equation is increasing the asset and expense accounts.
Credit – Accounts Payable: This transaction increases the account in the balance sheet that shows the amount of money owed to creditors.

2. When Bills are Paid:

Debit - Accounts Receivable (increases assets) and Credit – Customer (increases equity).
Credit – Cash at Bank accounts (which would reduce the assets).

Hence, accounts payable are nearly always reported on the creditor side of the journal entries. The offsetting debit will vary depending on whether the new payable liability is being accrued for the first time or if an existing payable account is being cleared.

The normal balance of accounts payable is the accounts that have been bought on credit and are yet to be paid for.

Once more, in 99% of the instances accounts payable contain a credit balance in the general ledger as well as in the financial statements. The only exceptions would be a situation where the worker has been overpaid through their wages.

However, such overpayments are mostly rare and usually are only a temporary situation that is corrected as soon as it is noted. Thus, the balance that is exiting in the long-term for the accounts payable is the credit balance though it does not conform to the standard normal balance.

Whether Accounts Payable an Expense?

This is true given that accounts payable remain a liability while items that go into balances in A/P are not in themselves expenses. Miscellaneous expenses like rent, cost of stock, stationeries, electricity tariff, etc are charged to the expense account when they are incurred and the corresponding entry is passed to accounts payable.

AP can be viewed as a nominal account which is a temporary account that holds the information on the expenses that are yet to be paid using cash. The stated expenses, on the other hand, pass through accounts payable until they can be settled.

Conclusively, whether A/P is debit or credit

So in summary:

- Accounts payable is usually on the credit side whereas, accounts receivable is on the debit side of the balance sheet.
- usually debit expense accounts and credit A/P
- The following is also true when it comes to settling A/P, that is, it involves debiting the account to decrease the balance.

As with all accounting equations, understanding the normal debit/credit functioning makes handling this important liability account much simpler. Please do not hesitate to contact me with any other questions!