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Accounts payable vs receivable are two opposite principles that dictate the operations of a business. Understanding these two concepts is imperative for businesses that wish to gain insights into their accounting process.
Lenders and potential investors analyse the accounts payable and receivable equation to learn about a business’s financial condition. Businesses can only achieve success and build positive relations with their customers and suppliers when maintaining a healthy equilibrium between revenues and expenditures.
Accounts payable (AP), also labelled as current liabilities, refer to the funds that a business is yet to pay to its suppliers or creditors. AP is usually recorded upon receipt of an invoice containing mutually agreed payment terms. Upon receiving a bill for goods and/or services, the finance team records it as a journal entry and posts it to the general ledger as an expense.
The balance sheet indicates the total amount of accounts payable without listing individual items. The accounting team marks the expense as paid once an authorised approver sign the expense and the payment is initiated according to the contract’s payment terms, such as net-30 days or net-60 days.
A popular clothing brand, Infinity Fashion, orders 600 dyed t-shirts worth Rs.1,20,000 from its wholesale supplier, Lush Clothing, which then sent an invoice on May 12 with net-60 payment terms and no early payment discounts. Infinity Fashion’s bookkeeper creates an account payable journal entry and initiates payment of Rs.1,20,000 to Lush Clothing’s bank account on July 11 by debiting Rs.1,20,000 from Infinity Fashion’s inventory asset account.
Accounts Receivable (AR), also labelled as current assets, refers to the funds received from customers against invoiced products and/or services.
After providing customers with products and/or services, businesses usually issue bills based on mutually agreeable payment terms. The AR team is responsible for invoicing the customers and recording the invoiced amount as accounts receivable and payment terms.
Lush Clothing identifies Infinity Fashion as a valuable customer and offers them a net-90 days term with a 50% prepayment on all new purchase orders above Rs.1,00,000. When Infinity Fashion accepts the offer and makes an order worth Rs.1,00,000, Lush Clothing ships the order and records Rs.1,00,000 as an asset in accounts receivable, expecting the full payment of the invoice within 90 days (mutually agreed payment term) of the receipt of the t-shirts.
On a transactional level, each invoice is payable to one party and receivable to the other. Both accounts payable and receivable have the following commonalities:
|Accounts Payable||Accounts Receivable|
|Funds to be disbursed||Funds to be received|
|Documented as current liabilities on the balance sheet||Documented as existing assets on the balance sheet|
|Client’s record||Vendor’s record|
|Identified as a liability until paid||Identified as an income until removed|
|Results in cash outflow||Results in cash inflow|