Accounts Payable and Accounts Receivable
Updated: Aug 5
What are Accounts Payable and Accounts Receivable
Accounts payable and accounts receivable are costs and income that have been accrued but not yet paid and received. Therefore, accounts payable and accounts receivable are only recognized if you’re using accrual basis accounting.
Accounts Payable (AP)
Account payable are funds that you owe to your vendors, suppliers, and other companies you pay bills to. They are typically due within 30 days and are recorded under current liabilities on the balance sheet. However, every company has different billing cycles so it’s important to keep track of deadlines for each bill.
Accounts Receivable (AR)
Accounts receivable are funds that are owed to you, typically from a customer or client. This happens when you provide a good or service and the customer pays on credit or is billed afterward. Typically, you want to collect payment shortly after you provide the deliverables, making accounts receivable a current asset on the balance sheet.
Recording AP and AR
Accounts payable and accounts receivable are recorded using the double-entry bookkeeping method. Therefore, you will need to record a corresponding credit for every debit.
Accounts payable is recorded when you receive the bill. Before you input the information in your journal or software, ensure that all of the information is correct. If you receive physical bills and invoices, we recommend you scan them when you receive it and keep a folder either on your computer or in your accounting software where you can find them easily.
Since accounts payable is a liability, you will need to credit accounts payable when the bill is received and debit an expense or asset account, depending on what the good or service is.
Once the bill has been paid, you will need to credit cash and debit accounts payable to decrease the balance.
Accounts receivable is recorded once you have invoiced your customer or client. It is an asset account, but the principles of accrual basis accounting say that you need to record this sale as revenue, even if you haven’t received the money yet.
When you send an invoice, you will need to debit accounts receivable and credit revenue.
Once your customer or client has paid, you will debit your cash account and credit accounts receivable.
Accounts Payable vs. Accounts Receivable
As you can see, accounts payable and accounts receivable are pretty much the reverse of each other. Accounts payable is money that you have to pay someone else while accounts receivable is money that you will receive from someone else. They’re also accurately named.
If you need help managing your accounts payable and accounts receivable, our bookkeepers are here to do the job. We can help you stay on top of your accounts payable and accounts receivable to avoid late penalties and fees. Call us at (360) 756-5020 or contact us to see how we can help you!