Journal Entry to Clear Accounts Payable

Clearing accounts payable is the process that a company removes the payable balance from the balance sheet.

Accounts payable are a company’s outstanding obligations to its creditors for goods and services received. In other words, it is the money that a company owes to its suppliers.

Accounts payable is considered a short-term debt because it is typically due around 30 days based on the credit term. It is not expected to last for more than a year.

When a company purchases goods on credit, the supplier will send an invoice detailing the amount owed. The company will then record the invoice as an accounts payable.

Once the bill is paid, the accounts payable is said to be “cleared.” Accounts payable is important because it represents a company’s liabilities. This information is used in financial ratio analysis to assess a company’s financial health. High levels of accounts payable can signal that a company is having difficulty paying its bills, which can be a red flag for investors.

The company uses cash to settle the accounts payable for the supplies it had purchased on credit. The cash payment made to the supplier fulfilled the company’s obligation under the terms of the credit agreement and resulted in a decrease in the accounts payable balance.

In addition, paying with cash can help to build strong relationships with suppliers, as it demonstrates the company’s commitment to timely payments. As a result, using cash to settle accounts payable is a sound financial decision for many businesses.

Journal Entry for Clearing Accounts Payable

Accounts payable is the current liability account that presents the company obligation which raises from the purchase of goods or services to support the business.

Accounts payable is cleared when the company settles with the suppliers. It is the payment that the company needs to make based on the credit term, otherwise, it will impact the credit score. Serious lateness will have a negative impact on a future purchase from the supplier.

When the company makes a payment to the supplier, it will record cash deductions and clear accounts payable.

The journal eng try is debiting accounts payable and credit cash.

The accounts payable is the liability, so it decreases on the debit side. This entry will clear the accounts payable and reduce the cash balance.

Example

Company ABC has purchased inventory amount $ 35,000 from suppliers on credit. The company records the inventory and accounts payable on balance sheet. One month later, the company make a payment to settle the accounts payable with the supplier. Please prepare journal entry to clear accounts payable.

The company purchase inventory on credit, so they have to record the inventory and accounts payable on balance sheet.

When the company clears accounts payable, it means they make payment to the supplier. The accountant has to record cash out and remove the accounts payable.

The journal entry is debiting accounts payable $ 35,000 and credit cash $ 35,000.