Differences between Account Payables and Account Receivables
Any company's operations have financial transactions at its core. Whatever happens in a company, it ends in the exchange of money between two parties. But, not all businesses work on purely cash or upfront payment systems. They resort to the credit facility to maintain relationships, and sometimes, to make the business process easier for the entities involved. This system of doing business gives rise to terms like Account Payables and Account Receivables.
The basic difference between Account Payables and Account Receivables
As evident from the names, the Account payables include the company's due payments to the vendors, banks, financial institutions, or other business entities. The company is keeping the money payable on hold, which can be due to many reasons. The company may purchase the material from the vendors on credit too. So, to understand the total liability, account payables record is maintained by the companies.
Account receivables is another head that shows the amount that other parties owe to the company. These parties are mostly customers who get into some sort of understanding to make the company's payment in a systematic or structured manner. The parties purchase the items, goods, raw materials, and other supplies from the company on credit, all the proceeds from these sales are put under the head Account Receivables.
Example of Account receivable
Let's understand the terms through an example and find how they are computed in a balance sheet.
What happens when the sale has happened, and the payment is made?
When a company sells a product or services on credit it is consider accounts receivable. On the general ledger journal, it will show as a Debit to account receivables XXX credit to sales account XXX. The sales account is a revenue account which show up on the income statement, and the A/R is an asset account.
When the payment is received the journal entry will be Debit to cash XXX then credit to accounts receivables XXX. Both accounts are assets accounts.
How to record Account payables
The sole purpose of recording is to find at any point in time the amount payable and the information about the company with whom the transaction has been made.
The Account payable appears in the journal as:
Date of transaction, department for which the equipment is purchased; Account payable entry shows the credit of said amount, and the debit head mentions the department's expense. In this case the equipment is an asset to the company. So, the cost of this purchase needs to be deprecated over the period of life.
To record a payment for A/P. It necessary to Debit the A/P account XXX and credit the cash account XXX.
So, the basic function is to find the total asset or total liability of the company; the record can
help investors understand if the company is in a healthy state or not.