Journal entry for payment on account

Introduction

In business, we may make the purchase of goods on account from our suppliers and only make the payment at later date within the credit term that is allowed. In this case, when we make payment later, we need to make the journal entry for payment on account in order to eliminate the liability that we have recorded when we make the credit purchase.

The journal entry for payment on account will decrease the total assets as the result of cash outflow from the business for the payment. At the same time, the total liabilities on the balance sheet will decrease by the same amount as a result of reducing the payable balance.

Journal entry for payment on account

We can make the journal entry for payment on account when we make the payment to our supplier or vendor by debiting the accounts payable and crediting the cash account.

Account	Debit	Credit
Accounts payable	$$$
Cash		$$$

This journal entry of the payment is made to remove the amount of the credit purchase after we have successfully made the cash payment to the supplier or vendor for the credit purchase that we have made previously.

Likewise, this journal entry will reduce both total assets and total liabilities on the balance sheet as a result of the cash outflow from the business as well as the reduction of the balance of the accounts payable.

Payment on account example

For example, on December 31, we have purchased $3,000 of merchandise goods on account from one of our suppliers. And we have received these $ 3,000 merchandise goods on the same day of the purchase.

Later, on January 10, we have made a $3,000 payment on account to our supplier for the credit purchase that we have made on December 31 above. We use the periodic inventory system in our business to manage the merchandise inventory.

In this case, on December 31, we can make the journal entry for the purchase on account of the $3,000 goods under the periodic inventory system by debiting the $3,000 amount of the purchase to the purchases account as below:

December 31:

Account	Debit	Credit
Purchases	3,000
Accounts payable		3,000

This journal entry of the purchase on account will increase our liabilities on the balance sheet by $3,000 as of December 31 as the result of the increase in the accounts payable.

Later, on January 10, we can make the journal entry for the $3,000 payment on account by debiting this amount to the accounts payable to eliminate the $3,000 debt that we have owed and crediting the same amount to the cash account as below:

January 10:

Account	Debit	Credit
Accounts payable	3,000
Cash		3,000

This journal entry will eliminate the $3,000 liability that we have recorded as the accounts payable on January 10 above. Likewise, this journal entry of payment on account will decrease both total assets and total liabilities by $3,000 as of January 10.

Note:

If we use the perpetual inventory system in the example above, the purchases account will be replaced by the inventory account instead, for the journal entry of the credit purchases above. This is due to, under the perpetual inventory system, we need to update the inventory balance every time there is a movement of the inventory.

Credit purchase under the periodic inventory system:

Account	Debit	Credit
Inventory	3,000
Accounts payable		3,000