Accounts receivables and accounts payables are two key concepts of accounting. When keeping track of your business’s financial transactions, you’ll probably come across both terms. While accounts receivables and accounts payables sound similar, though, they are completely different. As a result, you should familiarize yourself with these two terms and their respective meaning. Only then will you be able to use them in your business’s accounting practices.
What Are Accounts Receivables?
An accounts receivable is money that a customer or client owes your business. If you sell a product or service to a customer and allow the customer after the product has been delivered or the service has been performed, the customer will owe your business money. That money is considered an accounts receivable until the customer has paid and fulfilled his or her obligation to your business.
What Are Accounts Payables?
An accounts payable, on the other hand, is money that your business owes to a supplier or vendor. It’s not uncommon for suppliers or vendors to their products or services on credit. In other words, they’ll deliver the product or perform the service for your business while allowing you to pay at a later date. In cases such as this, the transaction is recorded as an accounts payable because your business owes the supplier or vendor money for the purchased product or service.
The Differences Between Accounts Receivables and Accounts Payables
There are a few key differences between accounts receivables and accounts payables, the most notable being the way in which they are recorded. Accounts receivables are recorded as a current asset, whereas accounts payables are recorded as a current liability.
You can also use accounts receivables to secure financing for your business — something that’s not possible with accounts payables. Factoring, for example, involves the sale of accounts receivables to a factoring company. Accounts receivables financing is an alternative financing solution that involves the use of accounts receivables as collateral for a loan.
Accounts receivables and accounts payables have contrasting effects on your business’s cash flow. When your business generates accounts receivables, its cash flow will decrease. When your business generates accounts payables, its cash flow will increase.
Not all businesses have accounts receivables or accounts payables. Most businesses, however, will eventually come across either one or both of these transactions, in which case it should be properly recorded on a balance sheet.
Have anything else that you’d like to add? Let us know in the comments section below!