Paid on account journal entry is Debit the Accounts Payable Account and Credit the Cash/Bank Account. When a business makes a payment on account, it will be reduce its outstanding liability. This transaction occurs when a company pays off a portion or all of what it owes to a supplier or creditor i.e. account payable.
Example Scenario
Let’s assume a company owes ₹50,000 to a supplier and also deciding to pay ₹30,000 on account on 01-07-2024.
Journal Entry to Record Payment on Account
| Date | Account Title | Debit (INR) | Credit (INR) |
|---|---|---|---|
| 01-07-2024 | Accounts Payable Dr | 30,000 | |
| 01-07-2024 | To Cash or Bank | 30,000 |
Explanation:
- Accounts Payable Account (Debit: Reduces the liability account since the company is paying off part of its debt and Accounts Payable is a current liability under an balance sheet and reduced it.
- Cash Account Credit: Decreases the cash balance or bank balance, reflecting the outflow of cash or bank for settle the debt.
Summary
- Accounts Payable Account Debit: This entry decreases the liability, indicating that part of the debt has been paid off.
- Cash/Bank Account Credit: Reflects the reduction in cash/bank due to the payment of debt.
This journal entry ensures that the financial records accurately reflect the reduction in liabilities and the corresponding decrease in cash, maintaining the integrity of the company’s accounting records.
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