Account Payable and Account Receivable

 

Accounts payable are amounts a company owes because it purchased goods or services on credit from a supplier or vendor. Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer. On the company's balance sheet, accounts payables are recorded as liabilities while receivables are recorded as assets.

	Accounts Payable	Accounts Receivable
Refers to	Money that the company owes to others	Money that others owe to the company
Abbreviation	A/P	A/R
Paid to whom?	Accounts payable are amounts a company owes because it purchased goods or services on credit from a supplier or vendor.	Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer.
Recorded as	Liability (payable always a liability)	Asset (receivable always an asset)
How each affects a business?	Accounts payable will decrease a company's cash	Accounts receivable will increase a company's cash
What Causes this Transaction?	Purchasing goods on credit	Selling goods on credit

Account Payable (AP) 


Accounts payable (AP) and accounts receivable (AR) both deal with business credit. The difference is that AP deals with the businesses that you owe, while AR is about the businesses or individuals that owe you. 

Maintaining your Account Payable (AP) is about managing bills that you have to pay. These include product purchases, services or supplies used in the business, payroll and taxes and other items such as utility, internet, insurance or repair bills. To help you effectively manage your AP, consider the following;

• Keep your unpaid bills separate and prioritise them according to date and value.
• Use direct-debit or auto-charge services for recurring payments.
• Maintain consistency by making payments on the same date.
• Keep a record of all payments and file paid bills promptly to avoid paying twice.

When you use an accounts payable account, you enter the bills that you get from vendors when you receive them. 

Account	Debit	Credit
Office supplies	1,000
Accounts payable		1,000

When you later pay that bill, The net effect on accounts payable combining both the purchase and the payment is zero.

Payment to Vendor

Account	Debit	Credit
Accounts payable	1,000
Cash		1,000

Account Receivable (AR)

Handling Account Receivable (AR), on the other hand, is about managing and collecting the money owed to your business from your customers. This can prove to be a more difficult process, particularly when dealing with collecting overdue accounts. To handle your AR effectively, you will need to consider the following factors when setting up your AR process:

• Properly maintaining customer details and credit information. 
• Appropriate credit terms and billing cycle – remember the faster you bill, the faster you will get paid.
• Providing small discounts to encourage early payment.
• Developing and maintaining age receivable schedules,
• Regularly review age receivables and monthly customer statements.
• Implement policies to ensure timely and efficient collection of outstanding accounts, such as making follow up phone calls or setting reminders.

Recording Sales of Services on Credit

When you sell services to a customer, you normally create an invoice in your accounting software, which automatically creates an entry to credit the sales account and debit the accounts receivable account. When the customer later pays the invoice, you would debit the cash account and credit the accounts receivable account. For example, ABC International billings a customer for $10,000 in services, and records the following entry:

	Debit	Credit
Accounts receivable	10,000
Sales		10,000

Recording Sales of Goods on Credit

If you were to sell goods to a customer on credit, then not only would you have to record the sale and related account receivable, but you would also record the reduction in inventory that was sold to the customer, which then appears in the cost of goods sold expense. This later transaction reduces the inventory asset in the balance sheet and increases the expenses in the income statement. For example, if ABC International were to conclude a sale transaction for $25,000 in which it sold $12,000 of merchandise to the customer, its journal entry would be:

	Debit	Credit
Accounts receivable	25,000
Sales		25,000
Cost of goods sold	12,000
Inventory		12,000

Resources for more information:

Nonprofit Accounting Basic , Financial Accountability = Nonprofit Success

Business Building Blocks online courses for small business

Green Plus, Institute for Sustainable Development

 Accounting Coach,  by by Harold Averkamp, CPA, MBA.

For Dummies by Stephen L. Nelson

Diffen, Compare Anything

Accounting Tools, Account Receivable Accounting