Journal Entry for Cash Payment

Cash payment is the process which a company uses cash to settle the payment with suppliers.

All the businesses need to purchase anything from the market as they cannot produce everything on their own. Company needs to purchase fixed assets to support its operations. They need to purchase the raw material to convert them into the finished product. They purchase the goods and resell them for profit. Most companies have to purchase one or more products to run the business.

After purchase, they have to pay the cash to settle the supplier. The company may purchase the items on credit and promise to pay the supplier later. However, the company cannot avoid cash payments. It is sooner or later that they have to settle with the supplier.

The cash payment will impact the company’s cash balance as they have to use cash to pay for suppliers. It will impact the cash on balance sheet. Another side of the transaction will impact the expense or assets which depend on the nature of the purchased item.

Journal Entry for Cash Payment

When the company used cash to pay for the purchase, the company will reduce cash and record increased assets or expenses. If it is the purchase of assets, the company will record assets increase and reduce cash payments. If it is the payment for an expense, company will record expenses on the debit side and reduce cash.

The journal entry is debiting assets or expenses and credit cash.

The transaction will increase assets on balance sheet which can be the inventory, fixed assets, or any other assets. Sometimes, they have to record expenses instead when the company uses cash to settle for the expense which can be payroll, utility expenses, and other expenses. The other side of the transaction will impact the cash balance.

Example

Company ABC is a trading company, during the month, there are several transactions below:

• Use the cash on hand $ 2,000 to pay for the electricity.
• Buys a car on credit for $ 50,000
• Pay cash $ 5,000 to settle the accounts payable with the supplier

Please prepare journal entry for cash payment.

Company ABC records the cash payment transaction when the company uses the cash to pay for the supplier or other parties.

When the company pays for the electricity, it is an example of a cash payment. They have to record electricity expenses and cash paid. The journal entry is debiting electricity expense $ 2,000 and credit cash on hand $ 2,000.

For the second transaction, company purchased a car on credit for $ 50,000. It is not the cash paymet, but the purchase on credit.

The third transaction, the company settles the accounts payable, they use cash to pay for the obligation. They have to reverse the accounts payable and reduce the cash. The journal entry is debiting accounts payable of $ 5,000 and credit cash of $ 5,000.