Payment of a Liability Using Cash

A payment of a liability to a Supplier (Accounts Payable) of 4,000 is made using cash.

How do you show the Payment of a Liability?

The Payment of a Liability transaction is shown in the accounting records with the following bookkeeping entries:

The Payment of a Liability Journal Entry
Account Debit Credit
Accounts Payable 4,000
Cash 4,000
Total 4,000 4,000

Payment of a Liability Bookkeeping Entries Explained

Debit – What came into the business
The Liability to the Supplier is reduced by the amount paid.

Credit – What went out of the business
Cash went out of the business with the payment of a liability to settle the Supplier Account

The Accounting Equation

The Accounting Equation, Assets = Liabilities + Capital means that the total assets of the business are always equal to the total liabilities plus the equity of the business This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.

Payment of a Liability Accounting Equation
Assets = Liabilities + Owners Equity
Cash = Supplier Paid + None
– 4,000 = – 4,000 + 0

In this case both the Assets and the Liabilities are reduced by the same amount (hence the – sign on each side of the equation).

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