When a company pays off a liability, it reduces both the liability and the cash (or bank) account. Here’s how the journal entries would look for different types of liabilities.
Example 1: Paying Off Accounts Payable
Scenario:
Company A pays off $10,000 in accounts payable on October 15, 2024.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 10-15-2024 | Accounts Payable | 10,000 | |
| 10-15-2024 | To Bank | 10,000 |
Explanation:
- Accounts Payable will debited to reduce the liability since the amount owed to suppliers is paid off.
- Bank will credited to reflect the bank outflow.
Example 2: Paying Off a Loan (Principal Only)
Scenario:
Company A repays $25,000 of the principal on a loan on October 20, 2024.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 10-20-2024 | Loan Payable | 25,000 | |
| 10-20-2024 | To Bank | 25,000 |
Explanation:
- Loan Payable will debited to reduce the liability for the amount of the principal repaid.
- Bank will credited to reflect the bank outflow.
Example 3: Paying Off Accrued Expenses
Scenario:
Company A pays off $5,000 in accrued salaries on October 25, 2024.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 10-25-2024 | Accrued Salaries Payable | 5,000 | |
| 10-25-2024 | To Bank | 5,000 |
Explanation:
- Accrued Salaries Payable will debited to reduce the liability for the salaries that were previously accrued but now paid.
- Bank will credited to reflect the bank outflow.
Example 4: Paying Off a Tax Liability
Scenario:
Company A pays $8,000 in income taxes owed on November 1, 2024.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 11-01-2024 | Income Taxes Payable | 8,000 | |
| 11-01-2024 | To Bank | 8,000 |
Explanation:
- Income Taxes Payable will debited to reduce the tax liability.
- Bank will credited to reflect the bank outflow for the tax payment.
These examples show how to record the payment of various liabilities, ensuring that both the liabilities and cash accounts are accurately updated in the company’s financial records.