Payment in accounting refers to the exchange of monetary value between two parties.
Written By Kevin Mil - Author/Founder
What is the definition of payment in accounting?
Payment in accounting refers to the exchange of monetary value between two parties as a result of a business transaction.
payment can be made in various forms, including cash, checks, electronic fund transfers, and credit card transactions.
payments can be classified as either cash or non-cash, and can be recorded as either an asset or a liability, depending on the circumstances of the transaction.
Classification of payment in accounting
payments can be classified as follows:
- cash payment: a payment made with cash, checks, or other forms of cash equivalents
- non-cash payment: a payment made with something other than cash, such as a credit card or an electronic fund transfer
- payment in advance: a payment made before the goods or services are received
- payment on account: a payment made towards an invoice or bill, but not the full amount
In addition to traditional cash and check transactions, payments in accounting can also include the exchange of goods and services.
This is why they are taxed, as opposed to money-based transactions.
For example, you can exchange an old car for a new one, and the old car is considered part of the payment.
Similarly, you can exchange stocks or other items of value for goods or services.
Payment processing in accounting can be complex.
For example, when a customer makes a payment in advance for goods or services that haven’t been delivered yet, accounting rules differ.
From the payor’s perspective, this prepayment is initially recorded as a receivable, essentially an asset, until the goods or services are delivered.
Conversely, the payee views the payment as a payable, a liability, since there’s no underlying asset to support it.
Once the goods or services are delivered, the payor recognizes the payment as an expense, while the payee records it as income.
Examples of payment in accounting
For example, if a company purchases office supplies for $100 cash, the payment would be recorded as a debit to office supplies (asset) and a credit to cash (asset).
conversely, if a company receives payment from a customer for services rendered, the payment would be recorded as a credit to cash (asset) and a debit to accounts receivable (asset).
Payment on accountin in accounting
Access to credit facilities can be a significant advantage for companies with good credit standing with their suppliers.
One way this manifests is through payment on account, which allows businesses to pay invoices partially and delay the payment of the balance.
For example, if a company pays $900 of an invoice of $1000, the entry for the original receipt of the invoice would involve debiting the Inventory or Expense account $1000 and crediting Accounts Payable $1000, disregarding taxes.
Meanwhile, the entry for the payment would involve debiting Accounts Payable $900 and crediting Cash in Bank $900.