A journal entry to record a payment on account will include a
a. debit to accounts receivable.
b. credit to accounts receivable.
c. debit to accounts payable.
d. credit to accounts payable.
The correct answer and explanation is :
The correct answer is d. credit to accounts payable.
Explanation:
When a business records a payment on account, it means that the company is settling a liability or outstanding debt. Let’s break down the situation:
- Accounts Payable: This account represents the amounts owed by the business to creditors or suppliers for goods or services that were purchased on credit. When the business agrees to pay these debts, the Accounts Payable account decreases.
- Cash or Bank Account: In this transaction, the payment is typically made using cash or a bank transfer, both of which are assets. When a payment is made, the company reduces its cash or bank balance, which is recorded as a credit to cash.
Journal Entry for Payment on Account:
In this case, the payment is made to a creditor for amounts owed. Here’s what the journal entry looks like:
- Debit: Accounts Payable (decreases the liability since the company is paying off its debt)
- Credit: Cash (decreases the cash asset since money is being paid out)
Why not the other options?
- a. Debit to Accounts Receivable: Accounts Receivable is used when customers owe the business money for goods or services provided on credit. This entry would be used if a customer was paying off a debt, not when the business itself is paying its creditors.
- b. Credit to Accounts Receivable: This would be incorrect because we are not recording a payment from a customer, which would involve reducing the Accounts Receivable (through a credit), but here we are making a payment to a supplier or creditor, which affects Accounts Payable.
- c. Debit to Accounts Payable: A debit to Accounts Payable would increase the balance of accounts payable, which is not appropriate when making a payment. Payments decrease the outstanding debt, which is done through a credit.
Thus, the correct journal entry involves a credit to Accounts Payable to reflect the reduction in liability and a debit to Cash to show the outflow of funds.