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ACCA Applied Knowledge · Financial Accounting · Double-entry bookkeeping principles including the maintenance of accounting records

Hamza Ltd pays a supplier, Orion Co, $4,200 by bank transfer in full settlement of an invoice already recorded. What is the correct double entry?

Debit trade payables and credit bank for $4,200. Paying the supplier reduces the liability owed, which is a debit to payables, and reduces the bank asset, which is a credit. Purchases were already recorded on the invoice, so they are not affected.

  1. ADebit Trade payables $4,200; Credit Bank $4,200Correct
  2. BDebit Bank $4,200; Credit Trade payables $4,200
  3. CDebit Purchases $4,200; Credit Bank $4,200
  4. DDebit Trade payables $4,200; Credit Purchases $4,200

Explanation

The payment reduces the liability, so trade payables are debited. Cash leaves the bank, so bank is credited. Debiting purchases would double count the expense, which was already recorded when the invoice was posted.

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