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What is Billable Expense Income?

What is Billable Expense Income? If you are running your own business, you must be deeply familiar with invoices and bills. After all, no business can survive without sending, receiving, and...
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Accounts Receivable vs. Accounts Payable – What's the Difference?

Up-to-date financial information is important for any business seeking outside investment. Accounts payable and receivable are essential accounts that show how much money flows in and out of a company.

You can ensure that your company's financial records are accurate by understanding the differences between these accounts and how to calculate and manage them. In this article, we'll go over what accounts payable and accounts receivable are and how they differ from each other,

What Is The Difference Between Accounts Receivable and Accounts Payable?

You'll record accounts payable and receivable as general ledger entries using accrual accounting. Revenues and expenses are recorded when they are incurred, not when cash is exchanged. When you give your customers credit, make an accounts receivable entry. When you buy something on credit, make accounts payable entry. 

You'll need to create debits and credits for each account because accounts payable and receivable require double-entry bookkeeping. This will assist you in balancing your books.

So what exactly is the difference between accounts receivable and accounts payable?

 

 Key Differences

BASIS FOR COMPARISON

ACCOUNTS RECEIVABLE

ACCOUNTS PAYABLE

Meaning

Money that the company expects to receive in the future for goods sold and services provided to customers on credit.

Money that the company expects to pay in the future for goods sold and services received from suppliers on credit.

Status

Assets

Liabilities

Concept

Amount owned by the entity towards debtors.

Amount owed by the company towards creditors.

Represents

Money to be collected

A debt to be discharged

Outcome of

Credit Sales

Credit Purchases

Results in

Cash inflows

Cash outflows

Components

Bills Receivable and Debtors.

Bills Payable and Creditors.

 

Definition of Accounts Receivable

Accounts receivable is the money owed to your business. It is an asset because it is money you will receive. You'll have accounts receivables if you give customers credit. However, you must still keep track of the transaction if you sell a product or provide a service but do not receive immediate payment. Accounts receivable are considered current assets because you expect to receive payment soon. Record the amount as a receivable in your accounting books to keep track of the asset. Debits increase assets while credits decrease them.

When you sell something to a customer but don't get paid, the amount, you owe increases. That means you'll have to deduct money from your accounts receivable. You'll also need to credit another account, such as inventory, to show a decrease in goods.

When a customer pays you, the amount of money you owe decreases, so you will credit your accounts receivable. And, you will debit your cash account since you have more money. 

 

Accounts Receivable Example

On June 2, 2021, XYZ Institute sold $500 worth of office supplies on account of ABC Company. In the transaction, their accounts receivables increased by $500, and their office supplies account decreased by $500. This is what it would look like in a journal entry:

 

Date

Accounts/Explanation

Ref

Debit

Credit

02-Jun-21

Accounts Receivables –ABC Company

 

$  500.00

 
 

Office Supplies

     

$  500.00

 

Sold office supplies on account

     

 

 Definition of Accounts Payable

Accounts payable (AP, payables) is the money you owe to vendors. A payable is a liability because you still need to pay it.

You will receive an invoice from your vendor if you purchase a product or service on credit. The invoice shows you how much money you owe or how much money you owe to your accounts payable. In addition, the invoice details whom you owe money and when the payment is due.

Payables are current (short-term) liabilities because invoices typically require payment within a short period. Record the amount as a payable in your accounting books to keep track of the liability. Credits increase liabilities while debits decrease them.

The amount of money you owe increases when you receive an invoice (accounts payable). You will credit the accounts payable because credits increase liabilities. You must also debit another account to balance the entry.

The amount you owe decreases when you pay off the invoice (accounts payable). You will debit the accounts payable because debits reduce liabilities. To show a decrease in assets, you must credit your cash account.

 

Accounts Payable Example

On June 1, 2021, XYZ Institute purchased $1,000 worth of computer equipment on account of ABC Company. It means their asset account, computer equipment, and their liability account, accounts payable, increased by $1,000. Below is what it would look like in a journal entry:

 

Date

Accounts/Explanation

Ref

Debit

Credit

01-Jun-21

Computer Equipment

   

$  1000.00

 
 

Accounts Payable- ABC Company

   

$  1000.00

 


Purchased Computer on Account

     

 

Conclusion

Your company's Accounts Payable and Accounts Receivable records are critical accounting records that help you assess the overall health of your company. In short, accurately recording and analyzing your accounts payable and receivable numbers assist in determining your company's bottom line. It also allows you to see how much cash your company would have if you received all due payments and paid all due debts.

As we all know every coin, has two sides, and the same is valid with accounts receivable and payable. If one company's accounts are receivable, there will almost certainly be accounts payable for another. Both are necessary for a business's survival and smooth operation. Therefore, complete control over accounts receivable and payable should be in place for effective working capital management.

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