Is “Payable” a Debit or Credit? Let’s Settle This Once and For All.

The straightforward answer is this: A payable is a credit. More specifically, when a payable increases, you credit the payable account. When a payable decreases, you debit the payable account. Now, before your eyes glaze over with accounting jargon, let’s unpack why this is the case and delve deeper into the fascinating (yes, fascinating!) world of payables.

Understanding the Basics: The Accounting Equation

At the heart of accounting lies the fundamental equation:

Assets = Liabilities + Equity

Think of it as a cosmic balancing act. Everything that a business owns (assets) must be financed either by what it owes to others (liabilities) or by the owner’s investment (equity). “Payables” fall squarely under the category of liabilities. Liabilities represent obligations a company has to external parties. When you have a payable, you owe someone money.

Payables: A Deeper Dive

What exactly is a payable? It’s an obligation to pay someone in the future for goods or services already received. It’s created when you get something now and promise to pay later. Think of it as a financial IOU.

The most common type of payable is accounts payable. These are short-term obligations, typically due within a year, arising from the purchase of goods or services on credit. For example, if your business buys office supplies from Staples and receives an invoice due in 30 days, that’s an account payable.

Other types of payables include:

• Notes Payable: A more formal agreement to pay back a loan, often with interest.
• Wages Payable: Money owed to employees for work already performed.
• Taxes Payable: Money owed to government entities for taxes.
• Interest Payable: Interest accrued on loans that has not yet been paid.

Why Payables Are Credits: A Practical Example

Let’s illustrate this with a simple scenario. Imagine your company, “Tech Solutions,” purchases $1,000 worth of computer equipment on credit from “Hardware Depot.”

Here’s how the journal entry would look:

Explanation:

• Debit to Computer Equipment: Your company now owns more computer equipment, increasing its assets. Assets increase with a debit.
• Credit to Accounts Payable: Your company now owes Hardware Depot $1,000. Liabilities (including accounts payable) increase with a credit.

When Tech Solutions later pays Hardware Depot, the entry will be:

Explanation:

• Debit to Accounts Payable: Your company now owes less to Hardware Depot. Liabilities (accounts payable) decrease with a debit.
• Credit to Cash: Your company has less cash, decreasing its assets. Assets decrease with a credit.

Notice how paying the payable decreased the balance and required a debit entry to the Accounts Payable account.

The Credit Side is Your Friend: Remembering the Rules

The reason many people get tripped up is because they confuse the “payable” from the other party’s perspective. Hardware Depot, in our example, would credit sales revenue and debit accounts receivable. As the buyer, the accounts payable is a liability of your company. Therefore:

• Increase in payable = Credit
• Decrease in payable = Debit

It is crucial to always consider the transactions from your company’s financial perspective to understand whether “Payable” should be debited or credited in your journal.

Frequently Asked Questions (FAQs) about Payables

Here are some common questions about payables to further solidify your understanding:

1. What is the normal balance of a payable account?

The normal balance of a payable account is a credit balance. This means that the account typically has a positive balance on the credit side.

2. Are payables considered assets or liabilities?

Payables are liabilities. They represent obligations to pay someone in the future.

3. What is the difference between accounts payable and notes payable?

Accounts payable are short-term, unsecured obligations arising from the purchase of goods or services. Notes payable are more formal, written agreements to repay a loan, often with interest.

4. How do I record the purchase of inventory on credit?

You would debit the inventory account (asset) and credit the accounts payable account (liability).

5. How do I record the payment of a payable?

You would debit the accounts payable account (reducing the liability) and credit the cash account (reducing the asset).

6. What happens if I don’t pay my payables on time?

Late payments can lead to penalties, interest charges, and a damaged credit rating. It’s important to manage your payables carefully and pay them on time.

7. Can I have a debit balance in a payable account?

While unusual, it’s possible. A debit balance in a payable account indicates that you have overpaid the vendor. This often requires investigation and potentially a refund from the vendor. It effectively becomes a receivable from the vendor.

8. How does accounts payable affect my company’s cash flow?

Accounts payable can significantly impact your company’s cash flow. Effective management of payables allows you to optimize your payment terms and conserve cash.

9. What is accounts payable turnover ratio?

The accounts payable turnover ratio measures how quickly a company pays its suppliers. A higher ratio generally indicates that a company is paying its suppliers quickly, which can be a sign of financial strength.

10. What are some best practices for managing accounts payable?

Some best practices include:

• Establish clear invoice processing procedures.
• Take advantage of early payment discounts.
• Negotiate favorable payment terms with suppliers.
• Monitor your payables balances regularly.
• Use accounting software to automate the process.

11. Are accrued expenses considered payables?

Yes, accrued expenses are a type of payable. Accrued expenses represent liabilities for expenses that have been incurred but not yet paid, such as accrued wages or accrued interest.

12. How do discounts affect the recording of accounts payable?

If you are offered a discount for early payment (e.g., 2/10, n/30), you would record the accounts payable at the full invoice amount initially. If you take the discount, you would debit accounts payable for the full amount and credit both cash (for the amount you actually pay) and a purchase discount account (for the amount of the discount).