Partial Payment to Creditor Journal Entry

Partial payment is the process which a company makes payment only part of the amount on the invoice received. The remaining balance will be paid later.

Nowadays, most of the company purchase materials and products on credit. The credit purchase allows the company manages its own cash flow more effectively. The management will have enough time to collect the cash from customers to pay for the supplier. It will not very tough for them to collect the money from customers or raise from other sources.

Even if the company purchase on credit, they are still required to make payment on a certain date base on the credit term. The buyer and seller usually negotiate the term beforehand, it should not be too long as the seller also needs to use cash to pay the creditor as well. It must not be too short, as the customers do not have enough time to resell the products and convert goods to cash.

The company requires to pay the full amount on the invoice to the supplier on the due date. However, they can negotiate with the supplier to delay some parts of the payment due to various reasons. It depends on the supplier policy or agreement. 

On the due date, the seller expects to collect the cash from the buyer. However, the buyer may not be able to make full payment. The buyer will try to delay the payment or make only a partial payment.

The partial payment will reduce the accounts payable balance on the balance sheet. But some part of the unpaid balance is still present on the balance sheet. The company has the obligation to settle the remaining balance.

Journal Entry for Partial Payment to Creditor

The partial payment happens when the company cannot make full payment to the supplier. They only pay part of the invoice and delay the remaining balance. A partial amount of the invoice still remains on the balance sheet as the accounts payable.

The company will reduce the cash balance and reverse part of accounts payable.

The journal entry is debiting accounts payable and credit cash.

The journal entry is debiting accounts payable to reduce the balance from balance sheet. Another side will reduce the cash balance

The accounts payable will remain on the balance sheet. When the company makes the final payment, they will record the same entry again. They need to record the final amount to reverse accounts payable completely.

The journal entry is debiting accounts payable and credit cash.

After the final payment, the accounts payable of this invoice will be removed from the company balance sheet.

Example

Company ABC purchase raw material amount of $ 20,000 on credit from a supplier on 01 May. After receiving goods, the company receives invoice and records accounts payable on the balance sheet. The company has to the whole amount on the due date, however, company negotiates with supplier to pay the partial amount first. Both parties agree, and ABC makes the following payment.

On 08 May, ABC make payment of $ 8,000

On 15 May, ABC make the final payment of $ 12,000 to the supplier.

Please prepare journal entry for the partial payment to creditor.

Based on the description, ABC purchase on credit $ 20,000 and record it as accounts payable. And later, they make a partial payment to supplier.

On 01 May, ABC receives goods and invocie from supplier. The company records accounts payable and goods received. The journal entry is debiting inventory (raw material) $ 20,000 and credit accounts payable $ 20,000.

It will increase raw material (inventory) and accounts payable on the balance sheet.

On 08 May, ABC make a partial payment of $ 8,000 to the supplier. The journal entry is debiting accounts payable $ 8,000 and credit cash at bank $ 8,000.

On 15 May, company make the final payment of the invoice to supplier. The journal entry is debiting accounts payable $ 12,000 and credit cash on hand $ 12,000.