Table of Contents
What is Accounts Payable?
Accounts payable is the accountability of a company to pay the money borrowed from creditors. Accounts payable only include money borrowed for short-term. It is the money which is yet to be paid for the goods or services taken. These amount due as debt is the liability of the company.
Double-entry system is used to pass journal entry for accounts payable. The position of accounts payable in balance sheet is under current liabilities column. Increase in accounts payable indicates that the purchasing activity within the firm is taking place more on credit.
Whereas decrease in accounts payable indicates that more and more debts are been paid by the company. Cash flow statement is prepared by two methods. Most commonly used is indirect method. Cash flow from operating income is the section under which increase or decrease in accounts payable is shown. Journal entry of accounts payable is Purchase A/c, Dr. To accounts payable A/c
Accounts payable plays a important role in maintaining cash reserve of a company. When cash reserve needs to be increased, time for payment of dues is extended. But the company needs to have the goodwill that creditors agree for receiving payment later. A stable company generally pays the debt on time.
Examples of accounts payable are: Purchase of machines, short-term loan taken, expenses of transport, bulk purchase of raw materials etc.
What is Accounts Receivable?
Accounts receivable is the money which is yet to be received. The goods and services are already sent to customers for use but the payment has not been made by the consumers. These due amount is the asset for the company.
Entries of accounts receivable are also passed by double entry system. The position of accounts receivable in the balance sheet is under asset column. Increase in amount of money due to receive indicates that more sales are made by the company on credit.
There is a time limit of receiving the amount back. The customers or consumers are bond to pay the amount within a year or legal action can be taken against them. This means that customers are legally bound to pay the amount for their purchase. Journal entry of accounts receivable is Accounts receivable A/c, Dr. To sales A/c
Accounts receivable shows the short term position of a company. The tool for analyzing the liquidity of a company is turnover ratio. Accounts receivable is the income for the firm as money is paid by the consumers within the given time period.
Difference Between Accounts Payable and Accounts Receivable
- Account payable is the debt on the company. While account receivable shows the liquidity of company.
- Accounts payable is amount yet to be paid by the company and account receivable is the amount yet to be received by the company.
- Account payable is current liability and account receivable is current asset.
- Current ratio is used for calculating accounts payable and turnover ratio is used to calculate accounts receivable.
- Account payable is an activity that involves purchases on credit. At the same time, accounts receivable is an activity that involves sales on credit.
Comparison Between Accounts Payable and Accounts Receivable
|Parameters of Comparison||Accounts payable||Accounts receivable|
|Meaning||Accounts payable is the amount which is yet to be paid for the purchase made||Accounts receivable is the amount which is yet to be collected by consumers for the purchase|
|Part of balance sheet||Current liabilities||Current asset|
|Activity on credit||Purchase on credit||Sales on credit|
|Accounting ratio||Current ratio||Turnover ratio|