Accounts Receivable and Accounts Payable 

What do the financial terms accounts receivable and accounts payable mean? This #accounting101 video covers the definitions of accounts receivable and accounts payable, where you can find accounts receivable and accounts payable in the financial statements, and how the journal entries work for accounts receivable and accounts payable.
⏱️TIMESTAMPS⏱️
0:00 Introduction to accounts receivable and accounts payable
0:18 What are accounts receivable and accounts payable
1:31 Accounts payable definition
1:51 Accounts receivable definition
2:26 Accounts payable journal entries
2:57 Accounts receivable journal entries
3:36 Accounts receivable and accounts payable summary
Accounts receivable and accounts payable are financial terms that you can find on the balance sheet. A balance sheet is one of the financial statements, and it shows at a point in time what you own on the left (often called assets) and what you owe on the right (often called liabilities). As the term balance sheet suggests, the sum of the amounts on the left has to equal the sum of the amounts on the right. Typical line items on the left side of the balance sheet are cash, receivables, inventory and fixed assets. Typical line items on the right side of the balance sheet are payables, accrued liabilities, debt and equity. Different companies use different names. Receivables are sometimes called Accounts Receivable, or Trade Receivables, or Debtors, or are abbreviated as A/R. Payables are sometimes called Accounts Payable, or Trade Payables, or Creditors, or are abbreviated as A/P.
How do #accountsreceivable and #accountspayable fit into the picture of a company’s operational process? Well, they are related to the incoming and outgoing invoice streams that a company may have. Accounts Payable is on the incoming side. The definition of accounts payable is: invoices from suppliers that you haven’t paid yet. From a cash flow standpoint, this is a great thing, as you are basically getting a free loan from your supplier: goods or services are delivered to you, and you do not have to pay for them in cash yet. Accounts Receivable is on the outgoing side. The definition of accounts receivable is: invoices to customers that they haven’t paid yet. It is a promise to pay in the future by your customer, and a right to collect for you. From a cash flow standpoint, this is a challenge, as you are basically supplying a free loan to your customer: you have delivered goods or services, but you have not been paid for them in cash yet. In order to manage cash flow, collect your accounts receivable as quickly as you can, and negotiate extended payment terms with your supplier.
How do the journal entries work on the accounts payable side? Remember, accounts payable are related to incoming goods and services “on credit” or “on account”. Let’s assume you bought inventory for your trading company, on credit from your supplier. The journal entry for this is debit inventory, credit accounts payable. Once you pay the invoice (30 days, 45 days, or 60 days later), you debit accounts payable, and credit cash.
How do the journal entries work on the accounts receivable side? Remember, accounts receivable are related to outgoing goods and services “on credit” or “on account”. Let’s assume your trading company sold goods, on credit to your customer. The invoicing part of the journal entry for this is debit accounts receivable, credit revenue. There is also an inventory movement aspect to the sales transaction, but that is a topic for a different video (that I will link to in the description below). Once the customer pays the invoice (30 days, 45 days, or 60 days later), you debit cash, and credit accounts receivable.
So remember: accounts payable and accounts receivable are related to incoming and outgoing invoices. Accounts payable is: invoices from suppliers that you haven’t paid yet. Accounts receivable is: invoices to customers that they haven’t paid yet. If that is a helpful explanation, then please press the “like” button for me.
Related videos:
Accounts Receivable - Days Sales Outstanding • Days Sales Outstanding...
Working capital management (including Accounts Receivable and Accounts Payable) • Working capital manage...
Cost of Goods Sold • Cost Of Goods Sold (CO...
Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: RU-vid videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!