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 company makes a payment on account, it is essentially settling an outstanding liability. In accounting, “on account” typically refers to amounts owed, meaning the company is paying off an amount that it owes to creditors or vendors. This is a transaction involving accounts payable, which represents the money the company owes to suppliers for goods or services received but not yet paid for.
Here’s how the journal entry works:
- Accounts Payable: This account reflects the company’s obligations to its creditors. When the company makes a payment, it reduces the amount of liability owed, so Accounts Payable will be credited (decreased).
- Cash: Cash is used to make the payment. Cash is an asset, and when a payment is made, the company’s cash balance decreases. Therefore, Cash will be debited (decreased).
Journal Entry:
- Debit: Cash (for the amount paid)
- Credit: Accounts Payable (for the amount paid)
This transaction ensures that the accounts payable balance is reduced by the payment amount, and the cash account reflects the outflow of funds.
Why the other options are incorrect:
- a. Debit to accounts receivable: Accounts receivable is used when a company is receiving payment from customers for goods or services sold on credit. This would not apply to payments made to creditors.
- b. Credit to accounts receivable: A credit to accounts receivable would reduce the amount of money owed by customers. This situation is unrelated to payments made to creditors, which is what “on account” refers to in this context.
- c. Debit to accounts payable: This would increase the liability (if the company owed more), but when making a payment, the liability is being reduced, so accounts payable should be credited.
Therefore, the correct accounting treatment for a payment on account is a credit to accounts payable.