As life goes on, we often find that we stumble upon things we need not have known earlier. Graduating from school as a science student, one might set up a business and come to the realization that knowledge in accounting and finance might be necessary. Running a business is not the only scenario where this may occur; even basic financial activities like doing taxes, saving, and investing need one to have a bit of prowess in mathematics and accounting.
Keeping financial records is very important and people without a background in finance often encounter problems and confusions in recognizing and working with certain concepts. An example of these confusing concepts is the “account payable” and the “account receivable”. Knowing the difference between these concepts can be crucial, as they are directly responsible for bringing balance to account records.
Before defining these concepts, it is pertinent to distinguish between assets and liabilities. Assets are basically properties and goods that a person owns that has value; which can also stand as collateral in debt repayment and sometimes can be used to earn an income. Liabilities are the amount of money owed by a person or company which has to be paid in the futures. An example of a liability is tax, mortgage, etc.
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This account is a current liability account that helps to keep record of any monies that one owes to any third party. The third parties include banks, financial institutions, creditors, the government, and other similar entities. Examples of account payable records include money lent from creditors, and goods and services purchased from certain other companies. This account type might record goods which have to be paid for immediately, or at least, sometimes in the nearest future, depending on the amount of money at hand and the contractual agreement between the recorder and the third party.
How is account payable recorded? One has to note that not every purchase transaction would be in cash. These transactions are said to be “on account” and are recorded as this; If a company buys company cars worth a hundred dollars from another company, the asset account of the company increases, and the liability account also increases by a hundred dollars
This is also known as “receivables”. Though it is recorded differently from the account payable type account, they are both similar, and opposite. The account receivable is a type of account that is used to record current asset account, for keeping records of the money people (third parties) owe the recorder. Like with account payable, these third parties include banks, financial institutions, debtors, etc. An example of things recorded under account receivables are
- Money that third parties borrowed from one, and are willing to pay back
- Income generated by one’s company
- Services that one’s company provide that other (third parties) pay for
Account receivable is recorded differently from account payable. If a company sells office folders to another company, the office folder account decreases, but the account receivables of the company increase.