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What is Debit Balance in Accounts Payable? - Meaning, Example, Reasons

By Athena Rebello

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Updated on: Nov 17th, 2023

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11 min read

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Accounts payable (AP) are outstanding payments for products purchased on credit from a business’s suppliers that must be repaid over a period of time. These payables are generally due within 30 days but may be closed within 90 days based on the terms of the contract with the supplier.

Since accounts payable is a current liability for the business, it usually has a credit balance. When the company pays off this liability, the accounts are debited. However, at times, there could be a debit balance in the accounts payable ledger. Continue reading to know more about a debit balance in accounts payable and how to record it in the balance sheet.

Are accounts payable a debit or credit balance?

Accounts payable refers to the outstanding payments a business owes suppliers for goods or services they have purchased but haven’t yet paid for. 

On a balance sheet, when the company owes money to someone, it is shown as a credit balance. Whereas when someone owes money to the company, it is considered a debit balance. Accounts payable typically is a credit balance on the balance sheet, however, there could be cases where it is a debit balance, depending on the nature of the transactions done.

A firm may accumulate these debts for a variety of reasons. However, only debts incurred as a result of everyday company activities and contracts with external vendors and suppliers are included in accounts payable.

What is debit balance in accounts payable?

A debit balance in accounts payable is unusual. Accounts payable is a liability and typically displays a credit balance. Whenever a company pays a supplier, this outstanding balance is reduced by crediting cash/bank and debiting accounts payable. 

However, there could be situations where a supplier has been paid in excess due to an accounting error, or the invoice that was paid for is reversed or cancelled, leading to a debit balance in the supplier’s account. It could also happen in cases where an invoice was mistakenly accounted for twice, and the mistake was later detected after payment had been made. 
In simple words, it means that the company has paid more money to its suppliers than the total outstanding amount it owes them.

Example of a debit balance in accounts payable

Let's say Company XYZ purchased inventory worth Rs. 35,000 from its vendor on 1st July 2023 and promised to pay back the amount in one month. 

Here, the account payable account is credited with Rs. 35,000 because the company owes the vendor for the purchase, which increases the liability.

Journal Entry for the Purchase of Inventory:

DateAccountDebit (Dr)Credit (Cr)
1st JulyInventory35000 
                       To accounts payable 35000

After one month, Company XYZ pays back the amount with cash. This means the cash account will be credited, while the account payable account is debited because the company is reducing its liability by making the payment. However, due to an error at the time of payment, the supplier was paid Rs.53,000 instead of Rs.35,000, leading to a debit balance in the supplier’s account.

DateAccountDebit (Dr)Credit (Cr)
1/8/23Accounts payable53000 
           To cash 53000

Reasons for debit balance in accounts payable

There can be many reasons for a debit balance in accounts payable. However, the most common ones are:

  • Recording a payment to a creditor as a debit instead of a credit
  • Paying off a supplier’s dues in excess
  • Reversing or cancelling an invoice after payment has been made
  • Accounting for an invoice twice
  • Returning products to the supplier after they have been paid for

How to treat a debit balance in accounts payable?

It is important to identify the cause of a debit balance in accounts payable and take appropriate action. Here’s how to address a debit balance in accounts payable:

  1. Review transactions: Thoroughly review all the accounts payable transactions to identify the source of the debit balance.
  2. Check for overpayments or errors: Determine whether the debit balance is due to an overpayment to the supplier or due to an accounting error, such as duplicate entries or incorrect data entry.
  3. Contact the supplier: If the debit balance is due to an overpayment, contact the supplier to request a refund. If the supplier doesn’t agree to a refund, ask for a credit memo to offset the overpayment against future purchases.
  4. Pass an adjusting journal entry: If the debit balance is due to an accounting error, pass the necessary adjusting journal entries. The specific journal entry required will depend on the nature of the error. For example, if a duplicate payment was made, you'd need to reverse one of the payment entries.
  5. Reconcile accounts: After making the necessary adjustments, reconcile the accounts payable ledger to ensure that the balance is now correct.
  6. Maintain documentation: Keep a detailed record of the actions taken to correct the debit balance, including communication with the supplier, journal entries passed, and supporting documents. This is essential for audit purposes and future reference.
  7. Improve internal controls: To prevent similar issues in the future, consider enhancing internal control related to the accounts payable process. Some measures include implementing a system for invoice approval and payment verification, conducting regular data reconciliations, and ensuring proper segregation of duties. 

Companies must carefully monitor their books of accounts and take appropriate steps to control and reduce any debit balance in accounts payable. This includes prioritising payments and negotiating with suppliers to minimise financial challenges.

While keeping track of accounts payable is usually simple, sometimes it might get a little complex when there are several creditors involved. To help with this, you can think of investing in accounts payable software that makes it much easier for tasks such as vendor onboarding, invoice processing, reconciliations, and payment tracking.

About the Author

A Chartered Accountant by profession and a writer by passion, my expertise extends to creating insightful content on topics such as GST, accounts payable, and invoice discounting.. Read more

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