Accounts Payable and Accounts Receivable: Definition and Difference

Table Of Contents

1 Accounts Payable and Accounts Receivable
2 What is Accounts Payable?
3 What is Accounts Receivable?
4 How to Record Accounts Payable?
5 How to Record Accounts Receivables?
6 Discounts for Accounts Payable and Accounts Receivable
6.1 Notation for Discount
6.2 Example of recording in accounts payable
6.3 Example of recording in accounts receivable

Accounts Payable and Accounts Receivable

In accounting, sometimes confusion arises when working between Accounts Payable and Accounts Receivable or accounts payable and accounts receivable.

The two types of accounts are very similar in the way they are recorded, but it is important to distinguish between accounts payable vs accounts receivable because one is an asset account and the other is a liability account. Combining the two can lead to a lack of balance in your accounting equation, which carries over to your basic financial statements.

It is important to note the importance of balancing your assets and liabilities and shareholder equity in accounting.

The significance of balances can be explained by the basic accounting equation: Assets = Liabilities + Equity. You can also rearrange the equations to better suit their preferences.

What is Accounts Payable?

Accounts payable or accounts payable are current liability accounts that track the money you owe to any third party.

The third-party could be a bank, company, or even someone you are borrowing money from. One common example of accounts payable is purchases made for goods or services from another company.

Depending on the terms of payment, the amount is usually due immediately or within a short period of time.

What is Accounts Receivable?

Accounts receivable are current asset accounts that track money owed by third parties to you. Again, this third party could be a bank, a company, or even a person borrowing money from you.

One common example is the amount you have to pay for goods sold or services your company provides to generate revenue.

How to Record Accounts Payable?

In business transactions, companies will often buy goods on credit (not cash). The term used to describe transactions is “on account” purchases, which means transactions in which cash is not involved. The best way to illustrate it is through an example.

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