Intermediate Financial Reporting 1 Practice Exam

Paying off a liability reduces both what you owe and what you have on hand. When you settle an accounts payable balance, you debit the liability to decrease it and you credit cash to reflect the cash leaving the business. Since Accounts Payable normally carries a credit balance, debiting it lowers the obligation. Cash is an asset with a normal debit balance, so credit reduces its amount. That makes the entry: Debit Accounts Payable; Credit Cash.

If you tried Debit Cash; Credit Accounts Payable, you’d be increasing cash and increasing the liability, which doesn’t represent paying a bill. Debiting Revenue or Debiting Inventory would also misstate the effect, as they relate to different parts of the business (revenue and inventory, not the payment of a liability).