What are Accounts Payable and Accounts Receivable?
- It is the money that a company owes and is “to be paid” at a future date for products bought or services availed from a vendor.
- It is a pending outflow; hence it appears in the balance sheet on the liability side.
- It is used as a short-term financing tool, creating a purchase-to-payment cycle and financing working capital needs.
- Managing payables is one of the most crucial parts of the business as it directly affects the goodwill and reputation of the company.
- The money is “to be received” on outstanding bills for merchandise or services purchased by customers.
- It appears as an asset in the balance sheet and refers to pending cash inflow.
- The customers would always look for an excuse to delay payments. Moreover, due to heavy competition allowing credit facility is part and parcel of modern-day business.
- Hence, managing the accounts receivables is one of the top pain and priority areas of any business.
How are they recorded in the books of accounts?
The best way to explain this is through examples:
Company A purchased electronic equipment worth $12000 from vendor B on credit, so liability and asset both increased by $12000 on the balance sheet. Journal entry for this will be:
Electronic Equipment………Dr. $12000(Dr.)
To Accounts Payable- Vendor B……… $12000(Cr.)
Whereas company A sold finished goods worth $1500 to customer B on credit, so asset in the form of receivable increased by $1500, and closing stock decreased by $1500, thereby balancing the asset side of the balance sheet. Journal Entry for this will be:
Accounts Receivable- customer B……….Dr. $1500(Dr.)
To Sales- ……………… $1500(Cr.)
What is the difference Between Accounts payable & Accounts Receivable?
1. Meaning :
- Accounts Payable refers to the amount that the company owes to others due to credit purchases made
- Accounts Receivable refers to the amount that others owe to the company due to credit sales by the company.
2. Nature :
- Accounts Payable is a liability and creates a cash outflow when paid.
- Accounts Receivable is an asset and creates a cash inflow when received.
3. Types :
Types of Accounts Payables:
- Short-term payables: These are required to be paid within one year and arise on the purchase of inventory, supplies, or expenses.
- Long-term payables: These can take more than one year to pay off and can be recurring in nature if linked to financing for a company such as a loan etc.
Types of Accounts Receivables:
- Trade receivables: These are the money receivable in the day-to-day trade from the customer. It is short-term in nature.
- Non – trade receivables: These refer to money receivable from other sources, e.g., Insurance claim receivable. These can range from medium to long term.
Accounts receivable and accounts payables are part and parcel of the business cycle. Financial Analysts use these for calculating various financial ratios for the valuation of the company.