Accounts Payable vs Accounts Receivable
Accounts payable and accounts receivable are two terms commonly used in business transactions. They refer to the two sides of a transaction; a payable and a receivable. Accounts payable refers to the money that any company has to pay for services and goods. These are those amounts which a company owes as a result of purchasing services or goods on credit from a vendor or supplier. The amount is not immediately payable. Accounts receivable is the exact opposite. It is that amount that a company expects to receive for the services and goods which it has sold. They are amounts which a company rightfully collects as a result of selling services or goods on credit.
In the same way that accounts payable is not immediately realized, accounts receivable is not also immediately realized.
Accounts payable fall under liabilities while accounts receivable fall under assets. Accounts receivable means that a company has to receive cash while accounts payable means a company must spend cash. Accounts payable are the debts of a company that have to be paid within a certain time period to avoid defaulting. Accounts receivable keep track of the money which a company anticipates to receive while accounts payable keep track of the obligations that a company should pay.
Assuming that Company ABC Ltd sold goods on credit to Company XYZ and probably the invoice states that the amount is payable in 30 days. Company ABC records a sale and an accounts receivable as well. On the other hand, Company XYZ will record a purchase maybe as an inventory and at the same time record an accounts payable. Every transaction has got two sides to it; also in accounting, there has to be symmetry. Company ABC has got a receivable and a sale while company XYZ has a payable and a purchase.
Although the accounts receivable procedures are similar to accounts payable procedures, accounts receivable procedures are more complex because they relate to money collection. The accounts payable procedures are not as strict. Accounts receivable and accounts payable have been developed as per industrial standards, policies and financial condition. Accounts receivables normally come in form of operating lines of credit. In the balance sheet of a company, accounts receivable are normally recorded as assets. Accounts payable on the other hand are recorded as liabilities in the balance sheet of a company.
Other differentiating factors of accounts receivables and accounts payables include:
- Accounts receivables can be offset by doubtful accounts allowances while there is no such offset for accounts payables.
- Accounts receivable normally involve only a single account of trade receivables and a non -trade receivable accounts while payables may be comprised of several accounts including sales tax payable, trade payables, interest payable and income tax payable.
- A company’s cash is decreased by accounts payable while the same is true for accounts receivables.
So that sales products can be created, there has to be many payables created which can then result to receivables. For instance, a wholesaler may purchase a refrigerator from a manufacturer. To the manufacturer, this results to accounts payable. When the wholesaler sells this refrigerator on credit to a customer, this is how an accounts receivable is created. Therefore, in order for payables to be produced, payables are needed.
Importance of Balancing Accounts Receivables and Accounts Payable
Managing accounts payables and accounts receivables results to a major impact on the business liquidity. In a business, liquidity refers to the positive net working capital which means that there is sufficient cash at hand for keeping the business in operation. The difference in current assets and current liabilities is the working capital. When assets are timely collected and liabilities settled in a balanced way, the business assumes a positive and healthy net working capital.