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Every business owner needs to set up the books of account where they accurately maintain the sales & purchase record that is essential to assess business health. While doing so, it’s imperative that business owners need to be familiar with certain accounting terms and the first among all stands are Accounts receivable and Accounts payable.
Accounts receivable and Accounts payable are the general ledger entries that are recorded in the books of account under accrual accounting. These are recorded when expenses and revenues are incurred or earned, not when money or cash is exchanged.
Account receivable entry is created when credit is offered to the customer, and Accounts payable entry is created when a purchase is made on credit.
Both, Accounts receivable and Accounts payable, are part of double-entry bookkeeping, thus entries of credits and debits for each account are recorded that helps to balance the account books.
Accounts Receivable vs Accounts Payable
The difference between Accounts Receivable and Accounts Payable is that accounts receivable are the assets of a company and accounts payable is the liability of the company. Accounts receivable is an amount that should be received by the company from its customers while accounts payable is the amount that a company has to pay to its suppliers.
Comparison Table Between Accounts Receivable and Accounts Payable
|Parameter of Comparison||Accounts Receivable||Accounts Payable|
|Definition||Accounts receivables are the money that is yet to be received by the business from their debtors.||Accounts payables are the money that is yet to be paid by the business to their creditors.|
|Accounting Fundamental||Asset or Revenue||Liability or Expenses|
|Money Movement||The money will be collected.||The money will be paid.|
|Scope||On debtors.||On business itself.|
|Cash Flow||The inflow of cash will happen that will increase the business funds.||The outflow of cash will happen that will decrease the business funds.|
|Comprised||Bills receivables and Debtors.||Bills payable and Creditors.|
What is Accounts Receivable?
Accounts Receivable is the money or cash owed to the business. It stands as a current asset to the business because money will be received from the debtors in the future. When you sell goods or services to the buyer on i.e. cash is not collected immediately, you create the accounts receivable and the purchaser becomes your debtor.
You record this transaction amount as accounts receivable in your books of accounting. Debits increase the assets and credits decrease the assets.
Let’s understand it with an example:
When a business makes the sale but payment or money is not collected immediately, so entry is being made in the books of account that are owed to you. Look here how it is recorded in the ledger or would look.
|XYZ Company owes $350 for supplies||$350||$350|
Now, when the business receives the payments, they need to create the new transaction or entries that will reflect the increase in cash and decrease the money that is owed to you.
This is how the entries in the books of the account will look.
|12/28/2019||Cash Received||XYZ Company pays $350 for supplies||$350||$350|
If the receivable period is too-long than collecting cash from the debtors can be a little difficult.
What is Accounts Payable?
Accounts payable is the money or cash you owe to suppliers or vendors. An account payable is marked as a liability because you need to pay the amount to the creditor. If a business purchases any good or service on credit, the invoice for the same is received by the business from the vendor.
That particular invoice explains how much money is owed by the business or is their account payable to whom along with a due date.
This requires the payments to be done in a short period, thus account payables are termed as current liabilities. The amount is recorded in the books of account under liability, where it is decreased by debits and increased by credits.
Let’s understand it with an example:
When a business buys any goods or services but the payment is not done immediately, so entry is being made in the books of account that you owe the said amount to XYZ.
Look here how it is recorded in the ledger or would look.
|12/19/2019||Accounts Payable for Inventory||$350 owed to XYZ Company for supplies||$350||$350|
Now, when the business makes the payments, they need to create the new transaction or entries that will reflect the same. This is how the entries in the books of the account will look.
|12/19/2019||Accounts Payable Cash||Payment of $350 to XYZ Company for supplies||$350||$350|
Accounts Payable is created on a specific set of terms within the particular period that is called a collection period. The too-short collection period duration affects the ability to clear debts.
Main Differences Between Accounts Receivable and Accounts Payable
Both accounting terms are important to understand to demark the revenues and expenses that will be earned or incurred soon, else it business may end up in the void.
- Accounts Receivable means that business has sold the goods or services on credit to the buyer and not received the money on an immediate basis; rather it will be received shortly. Whereas Accounts Payable covers the credits that a business has taken from the supplier or vendors when they have purchased the goods or services or raw materials.
- Accounts receivable is marked as an asset while Accounts payable is marked as a liability.
- In Accounts receivable, cash will be collected whereas, in Accounts payable, cash will be paid.
- Accounts receivable comes from credit sales while Accounts payable comes from credit purchases.
- The inflow of the cash happens under Accounts receivable whereas, in Accounts payable outflow of the cash happens.
Frequently Asked Questions (FAQ) About Accounts Receivable and Accounts Payable
Can the same person do Accounts Payable and Accounts Receivable?
Yes, accounts payable and accounts receivable can be done by the same person if all the transaction details are available with him. This includes records related to the deferred payments, both receivable and payable by the company.
In small business concerns like sole proprietorships and partnership organizations, accounts payable and accounts receivable are often handled by a single person who is in charge of the accounts department.
Is Accounts Payable debit or credit?
Accounts payable is a liability for a business so it has a credit balance. Whenever a company procures goods or services on credit, it is recorded as accounts payable and the amount is credited to the accounts payable account.
What skills are needed for Accounts Receivable?
For up-to-date maintenance of accounts receivable, one needs to be well acquainted with the principles of bookkeeping, accounts, and ledgers. This requires the person to be skilled in maths and account analysis.
Most importantly, he should have an eye for detail and a habit of keeping up-to-date records of unpaid invoices, customer payments, deductions, and collections made.
What are the duties of the Accounts Receivable specialist?
The main duties of an accounts receivable specialist are:
- Preparing regular reports of invoices. This includes an up-to-date entry of bills receivable against goods or services offered by the company.
- Recording deferred payments by debtors, customers, and vendors.
- Making regular entries associated with payments received and bills cleared by various parties including customers, clients, debtors, and dealers.
- Making ‘Adjusting Entries’, calculation of penalty for late payments, and providing concessions for making early payments.
- Sending payment reminders to avoid delays and late payments.
What are the Duties of Accounts Payable Specialist?
The duties of accounts payable specialists are:
- Checking invoices and processing them to ensure timely payment.
- Ensuring that all the bills payable to vendors and internal clients are processed without any delays.
- Documentation of bank reconciliations and loans.
- Monitoring automatic payments and ensuring proper documentation of all the deferred payments.
- Verifying deductions, discounts, and concessions receivable for making advance payments.
Accounts Receivable and Accounts payable can be seen as the two sides of the coin. Every business transaction has a component of either i.e. accounts receivable or accounts payable if that is done on credit.
Like company X sells a product to company Y on credit, company X will become a creditor to company Y and company X will become a debtor to company Y.
If you are running the business or handling books of account under your profession, then you must understand the difference between them as most of the business transactions happen on credit note. It will help you to tackle the upfront business issues.
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