Finance is a broad field, which involves various jargon. For an individual who has studied finance, it will be easy to understand all these words, but for a layman such as regular folk outside the finance field, understanding these words can be a little challenging. Terms such as accounts payable and receivables are easy to understand when someone explains them to you in everyday language.
In simple terms, receive means to get so accounts receivable means when we get the money. Payable means to pay, so accounts payable means when we have to pay. Firms do have authorized accountants who keep a note of these transactions, and then report them together. The volumes of both accounts payable and receivable can be huge in case if we are talking of a big MNC or a large firm.
In finance, accounts payable and receivable may create confusion as they are recorded in the same way. It is essential to identify the difference between the two as one is a liability account while the other is an assets account for the organization.
One must have a clear understanding of both concepts to differentiate between the two. If someone does not have a clear understanding, the financial statements made will be incorrect. Some organizations hire companies that provide account payable services for smooth functioning.
What are Accounts Payable?
Account payable keeps the record of the money that an organization owes to a third party. It is a liability account for the company. The third-party can be any organization, e.g., bank, or any other company. Purchase (of goods and services) made from other companies is the best example of account payable. The amount needs to be paid immediately or within the period of time, depending on the terms and conditions of the repayment.
What are Accounts Receivable?
Account receivable keeps the record of the money the third party or parties owed to the organization. It is an asset account for the company like an account payable; the third party can be any other company or bank. The best example is the amount someone owes to you because you sold your goods and services to them.
How to Record Accounts Payable?
Records of the account payable and account receivable should be appropriately maintained. In business, the firms purchase goods and services on account and not cash. An example of account payable is:
On July 1, 2018, Moti Finance Institute purchased $2,000 worth of hardware on account from Hira Company. It means that the asset account, hardware, increased, and our liability account, accounts payable, increased as well by $2,000.
How to Record Accounts Receivables?
Similarly, in business, a firm sells goods and services on account and not on cash. An example of account receivable is:
On July 5, 2020, Moti Finance Institute sold $5000 worth of stationary on the diamond company account. In the transaction, accounts receivables increased by $5000, and stationary accounts decreased by $5000.
Discounts on Accounts Payable vs. Accounts Receivable
Some companies offer discounts on accounts receivable it benefits both parties as the borrower will save some money from the deal while the company will get paid fast, which will improve their cash flow. Account payable services can increase the turnover of the company by enhancing the cash flow.
