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Journal Entry for “Paid on Account” – a Quick & Easy Guide

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The term “paid on account” is a very common yet sometimes confusing concept in the accounting world, as it could involve either accounts payable or accounts receivable. In this guide, we’ll thoroughly explain the concept and present easy-to-understand journal entries for each scenario. Our goal is to ensure you have a clear and confident grasp of these transactions by the conclusion of this article.

Understanding “Paid on Account”

The concept of “Paid on Account” can apply in two different scenarios: “Accounts Payable” and “Accounts Receivable”. Here is a breakdown.

Accounts Payable – ‘Paid Creditor on Account’ Explained

In accounts payable (AP), “paid on account” means the payments a company makes to reduce what it owes to suppliers or creditors. These payments typically represent partial settlements against purchases made on credit or a debt/loan. For example, if a company owes $100 to a supplier for goods delivered, a $60 payment made to the supplier is recorded as ‘paid on account.’ This transaction decreases the company’s accounts payable balance, reflecting that $60 out of $100 outstanding debt has been paid.

Accounts Receivable – Getting ‘Paid on Account’ Explained

In accounts receivable (AR), “paid on account” means the payments received by a company from customers against sales made on credit. Typically, when a customer partially pays off their outstanding credit balance, these cash receipts are recorded as ‘paid on account.’ For instance, if a company sold a bicycle to a customer for $100 on credit, and the customer later paid the company $60, then the $60 was “paid on account” by the customer. This kind of transaction decreases the accounts receivable balance, indicating that the customer only owes the company $40 ($100 – $60 “paid on account”).

By comprehending ‘paid on account’ in both accounts payable and accounts receivable, businesses can accurately track their financial obligations and incoming payments, ensuring precise financial reporting and effective cash flow management. In the following section, we will walk through the specifics of recording these transactions in journal entries, supplemented by practical examples for each scenario.

Journal Entry for “Paid Creditor on Account” – Accounts Payable

Core concept: When a business pays a creditor on account, or in other words, reducing what the business owes, it results in a decrease in Accounts Payable and a simultaneous decrease in Cash. In accounting terms, this is shown as a debit to Accounts Payable and a credit to Cash. The double entry principle defines that a debit decreases the liability account (AP), and a credit decreases the asset account (Cash)

Example: Pho My Life (PML) Noodle Shops owes $1,000 for hot sauce purchased on credit. In other words, they received the hot sauces but haven’t paid the supplier yet. They just made a partial payment of $600 as they are short on cash. That is, they “paid creditor on account” for $600.

Journal Entry for Paid on Account - Accounts Payable

This payment is recorded as a $600 debit to Accounts Payable, reducing the liability owed to the Hot Sauce Company, and a $600 credit to Cash, reflecting the payment made. They now only owe $400 out of the $1,000 original balance to the Hot Sauce Company, their creditor.

Journal Entry for Getting “Paid on Account” – Accounts Receivable

Core Concept: When a business receives a payment from a customer on account, or in other words, partially collecting what was owed by the customers, it leads to a decrease in Accounts Receivable and an increase in Cash. This is recorded as a debit to Cash and a credit to Accounts Receivable. According to the double entry principle, a debit increases an asset account (Cash), while a credit decreases an asset account (AR).

Example: Pho My Life (PML) Noodle Shops conducted a catering event for Mr. Hungry. The total charge was $1,500, and Mr. Hungry just made a partial payment of $900. In other words, they just got “paid on account” for $900.

Journal Entry for Paid on Account - Accounts Receivable 1

This transaction is recorded as a $900 credit to Accounts Receivable, decreasing the amount owed by Mr. Hungry, and a $900 debit to Cash, showing the receipt of the payment. There is now $600 left out of the original balance of $1,500 from Mr. Hungry, the debtor.

Tips for Managing ‘Paid on Account’ Journal Entries

Many businesses may find it challenging to track when numerous payments made or cash collected from customers are recorded in either the “Accounts Payable” or “Accounts Receivable” accounts. For instance, how are you supposed to remember how much you owe Supplier A and Supplier B when all you have is an “Accounts Payable” balance of $1,000?

One common approach is utilizing subledgers like Accounts Payable (AP) Aging and Accounts Receivable (AR) Aging reports. These reports provide a breakdown of the amounts owed and the lengths of time that these amounts have been outstanding. They offer detailed insight into each creditor and debtor, making it easier to manage and track ‘paid on account’ transactions.

At the end of each month, a critical task is to perform a reconciliation between these aging reports or subledgers and the overall account balances of Accounts Receivable and Accounts Payable. This reconciliation ensures that the general ledger accounts reflect the detailed transactions recorded in the subledgers. It’s a vital step for confirming that the accounts are accurate and up-to-date, helping to prevent discrepancies and maintain the integrity of accounting records.

Key Takeaways

  • “Paid on Account” in Accounts Payable: This involves making partial payments to suppliers or creditors, reducing the business’s accounts payable, or liability.
  • “Paid on Account” in Accounts Receivable: It refers to receiving partial payments from customers, which decreases the amount owed by the customers, or accounts receivable.
  • Journal Entries:
    • In Accounts Payable: A debit to Accounts Payable reduces the liability, while a credit to Cash reflects the payment made.
    • In Accounts Receivable: A debit to Cash indicates received payment, and a credit to Accounts Receivable lowers the outstanding receivable amount.
  • Tips for Managing “Paid on Account”:
    • Using subledgers like AP Aging and AR Aging reports aids in tracking and categorizing outstanding amounts.
    • Monthly reconciling these reports with the general ledger is crucial for accurate accounting.

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