Buying goods or services on credit is a common thing these days. If an entity purchases and obtains a good or service and agrees to pay for the good or service at a later stage, it is said that the entity has purchased the good or service on credit. The vendor from whom the good or service is purchased is known as creditor. The obligation to pay cash for the goods or services received is recorded as a current liability known as accounts payable.
Let’s flip the picture and look at it from the vendor’s side. The vendor has sold a good or service on credit to an entity. The entity who bought the good or service on credit is known as debtor. The right to receive cash in exchange for the goods and services is recorded as a current asset known as accounts receivable. From the above discussion, we can say that:
Receivable of one party is a payable of other party!
Accounting of accounts payable
As per accrual basis of accounting, purchase of goods or services on credit is recorded in the following manner.
- Debit: An asset or expense is recorded.
- Credit: A current liability known as accounts payable is recorded.
When the entity pays for the goods or services,
- Debit: Accounts payable is decreased as it has been settled.
- Credit: Cash or bank balance is decreased.