Final answer:
When payment is provided to a vendor for a purchase made on account, it reduces the vendor's accounts receivable and the company's accounts payable. This keeps the accounting equation in balance.
Step-by-step explanation:
When payment is provided to a vendor for a purchase that was made on account, it affects the accounting equation by reducing both the vendor's accounts receivable and the company's accounts payable. Let's say the company purchased $1,000 worth of goods on account earlier in the month. The initial accounting equation would be:
Assets = Liabilities + Owner's Equity
Accounts Receivable + $1,000 = Accounts Payable + $1,000
When payment is provided to the vendor, the transaction would be recorded as follows:
Accounts Payable - $1,000
Cash or Bank - $1,000
This reduces the company's accounts payable by $1,000 and its cash or bank balance by $1,000. The accounting equation would now be:
Accounts Receivable + $1,000 = Accounts Payable - $1,000 + Cash or Bank - $1,000
This shows that both accounts receivable and accounts payable have decreased by $1,000, which keeps the accounting equation in balance.