The terminology used in accounting to describe transactions and assets can be confusing. It doesn't help that bookkeepers sometimes use shorthand for these general ledger terms. Luckily, we can help you start to clear up some of the basics.
You will often see two consistent things on your company's balance sheet and income statement lines: a credit entry (often on the right side) and a debit entry (often on the left side). This method is known as double-entry bookkeeping and is the most common accounting recording system.
In both accounts payable (AP) and accounts receivable (AR), you will see credits and debits used when the value in your account increases or decreases. These terms help describe the inflow and outflow of cash from your different accounts, including asset accounts, expense accounts, and cash accounts. On the most basic level, debits indicate inflow, credits indicate outflow throughout all of your different accounts.
Is accounts payable a credit or debit?
Accounts payable, first and foremost, are liability accounts. These accounts are labeled this way because you often pay on credit when purchasing items or services from vendors and suppliers. Because you may owe money to these creditors, your AP account will have a credit balance showing any current liabilities. Later, when you pay back your invoice, accounting debits your credit balance that amount. With this knowledge, we can answer our question: accountants credit and also debit your accounts payable. Both inflow and outflow occur within accounts payable, so it is both a credited and debited account.
Recording credits and debits as journal entries
While most accounting software can help you track credits and debits as journal entries by default, some small businesses and individuals may track this manually. Many companies use software (especially automation software) to help cut down on the amount of time doing data entry. While programs are here to help, it is essential to know how this process works to know which software is best for your team.
When looking at basic examples of accounts payable, you will often be referencing a purchase or vendor invoice. After the seller communicates this to you and the invoice is accepted, you will debit your purchases or inventory account with the value of the items, then credit your AP account with that same amount. When this is a short-term debt, you will later debit balance your AP account when you pay back the obligation.
This process can still be a bit tricky when it hasn't been put into practice. Let's look at some examples of how this will look in your accounts payable entries.
Accounts payable credit or debit examples
For our first example, we will follow the details we just used in the previous section. Let's say your company purchases goods, such as $200 worth of office supplies. This office supply expense will be a short-term liability, and you plan to pay the seller the total amount within the month. First, you will debit your appropriate account, such as a purchases account. Then, you will credit your AP account. Here is an example of this for a double-entry accounting system:
Once you are ready to pay back lenders, you will have to debit your accounts payable account and credit something, usually a cash account. So, what would that look like in our ledger? Let's say we are paying back that $200 invoice on our office supplies:
Accounts payable FAQs
What type of account is accounts payable?
Your accounts payable is a liability account, as is easily remembered by its current liabilities section. Liability accounts show how much a company owes and include short-term liabilities like accounts payable and long-term liabilities like loans payable. These accounts are essential in many ways, including calculating your owner's equity accounts and accurate tracking of your company's financial health.
What is the journal entry for accounts payable?
Any time you have an expense (for example, a rent expense, a vendor purchase, or an advertising expense), you will most likely credit your accounts payable account and debit another account. The basic journal entry for this will be:
You will then later pay this amount off to the creditor/vendor. When this happens, you will debit your accounts payable account and credit the appropriate account to represent paying that owed amount off.
What about accounts receivable?
Rather than being a liability account, accounts receivable is a current asset account. Accounts receivable works in much the opposite way of accounts payable, where you will often be debiting the accounts receivable account and crediting another. Once the customer pays off the invoice, you will credit your accounts receivable account to represent that paid invoice.
Automate accounts payable with Routable
Earlier, we mentioned that automation software can help make tracking accounts payable much easier. By reducing time spent on manual data entry, software updates, and vendor management, these products can help you cut costs and empower your accounting team to scale with your company. This tech can also prevent your company from costly mistakes and help better track data for accurate audit reporting.
A great example of accounting automation software is Routable. With Routable, customers saw 40% saved on the cost of bill payments and mass payouts and a 70% reduction in repetitive tasks that bog down automation teams. Routable can easily integrate with your team's workflow to help efficiently process your bills in whatever way works best for your team, including bulk processing through a sophisticated API. Automation gives your team a new level of control and flexibility, helping them save time and focus on things that matter, like risk reduction and vendor relations.