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.
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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.
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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: KZbin videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[@TheFinanceStoryteller]

Enjoyed this video? Then please subscribe to the channel, and dive deeper into accounts receivable by watching my video on bad debt accounting kzbin.info/www/bejne/p2i6maWVdpmXqKc and deeper into accounts payable by watching my video on purchase order matching kzbin.info/www/bejne/rH2TiXh-fr-ers0

[@magdalena3746]

You have explained the process in the best way possible!

[@TheFinanceStoryteller]

Thanks for the compliment, Magdalena! Very happy to hear that.

[@yosmuc]

Amazing as always. Thank you!

[@AlexFirsikoff]

Oh man this is the best and shortest explanation of these two concepts! Thank you ^_^

[@TheFinanceStoryteller]

Thank you, Oleksandr! Glad it was helpful! 😎

[@berjbedrosian4225]

Clear and straightforward. Thank you.

[@TheFinanceStoryteller]

Thank you for the feedback! Glad you enjoyed it. Perhaps the related video on working capital might also be useful for you: kzbin.info/www/bejne/jqercp-rnpJ1pNE

[@keithsmith8331]

Exactly what i was looking for. Thank you very much!

[@TheFinanceStoryteller]

You are welcome, Keith! Please subscribe, and spread the word.

[@leonmoodley1]

Thank you, keep the examples going, they are extremely helpful

[@TheFinanceStoryteller]

Glad you like them, Leon!

[@rmnthbhagat]

EXTREMELY HELPFUL. Thanks

[@TheFinanceStoryteller]

Glad to hear it!

[@aldianasyhari7655]

Thank you for the explanation. Helped ALOT!

[@TheFinanceStoryteller]

Glad to hear it! Hope you find many more videos that can be useful for you. Maybe this playlist has some: kzbin.info/www/bejne/mGqWfHWjmL2UpKs

[@markbevan3792]

so touching for an excellent video

[@rishabhjain5808]

Awesome discription clear the topic in brief

[@TheFinanceStoryteller]

Thanks a lot, Rishabh!

[@smrenterprisesbuildingmate4362]

Sir thank q u r so simple and perfect in ur lecture. U method of explain can easily trigger anybodies mind . Once again thank q.

[@TheFinanceStoryteller]

You're welcome! Nice to hear that. Happy to help.

[@stevem8955]

Thanks for the great video. I'm currently learning this now, and while I think I got the jist of it, you're video really help fill in a lot of the blanks. Thank you.

[@TheFinanceStoryteller]

Happy to help, Steve! Take a look at the video on working capital as well, that might help connect the dots: kzbin.info/www/bejne/jqercp-rnpJ1pNE

[@stevem8955]

@@TheFinanceStoryteller I will. Thank you.

[@mfaiz1388]

Very easy to understand. Great video 👍

[@TheFinanceStoryteller]

Thank you! Very nice to hear that. :-)

[@besiberani923]

Thanksm i finally understand. Thank you very much

[@TheFinanceStoryteller]

Great to hear that! 🙂

[@emberzona7077]

This is a time saving explanation. Good for me .

[@TheFinanceStoryteller]

Thank you!

[@lisamccray6481]

I found it. Thanks.

[@marijamaric6182]

I liked this video, short and right on point :D

[@TheFinanceStoryteller]

Happy to hear that, Marija! Thank you for watching and commenting.

[@ninjapirate123]

You taught me all of this faster and better than my accounting teacher

[@TheFinanceStoryteller]

Happy to help!!! More accounting 101 videos in this playlist: kzbin.info/www/bejne/mGqWfHWjmL2UpKs

[@aarthidevi.v5207]

I like this explanation.... and plz can u give more this like example of vedios....

[@TheFinanceStoryteller]

That's great to hear! Thank you. Good to know I am on the right track. Maybe my video on "How to generate more cash in your business" could be good for you to watch as well: kzbin.info/www/bejne/pqrLi6FqgNOaZrc

[@hungtien9326]

Very good and funny videos bring a great sense of entertainment!

[@TheFinanceStoryteller]

Thank you. Happy to hear you enjoy them.

[@CalebBrown228]

Thanks! Good job.

[@TheFinanceStoryteller]

Thank you for watching and commenting, Caleb! As follow-up, my video on working capital management kzbin.info/www/bejne/mWbMmpqZetWjkNk might be interesting for you as well.

[@Itsjesse_tz]

Well I've been through alot of videos today... Im glad i found this one😥😅

[@TheFinanceStoryteller]

I am very glad you did too!!!!! 😎

[@ALONE12196]

Perfect explanation.

[@TheFinanceStoryteller]

Glad you liked it, Jahandar!!!

[@elizad4373]

So helpful!

[@TheFinanceStoryteller]

Nice to hear that, Eliza! Thank you.

[@i_Fly36]

Thanks, big help.

[@TheFinanceStoryteller]

You're welcome!

[@saarvlogs.5094]

Weldone u explained very easily.

[@TheFinanceStoryteller]

Nice to hear that! Thank you for watching and commenting.

[@binteaslam6812]

Marvelous 👌 thanks

[@TheFinanceStoryteller]

Most welcome 😊

[@ManualdoStreamer]

Thanks for the explanation, I'm a job process interview and a need to know these kind of vocabulary

[@TheFinanceStoryteller]

Wishing you lots of success for the interview!

[@matthew3496]

very good explanation, thank you very much.

[@TheFinanceStoryteller]

Glad it was helpful, Matt! I think you might enjoy the related video on current assets and current liabilities as well: kzbin.info/www/bejne/gKiXhZSfhZllhpY

[@matthew3496]

@@TheFinanceStoryteller I will check it out! Only yesterday I realized a career in finance would be a great option, and I am diving in headfirst💪

[@TheFinanceStoryteller]

No better place to start than with a sold grasp of key accounting concepts in my Accounting 101 playlist kzbin.info/www/bejne/hYrUnWqPbrOheMk and an understanding of the "big picture" by reviewing real life finance case studies of well-known companies kzbin.info/www/bejne/hnqciWiPl8qelac Enjoy!!!

[@mohamedcaseemmohamedarshat6236]

Simple but excellent

[@TheFinanceStoryteller]

Thanks a lot 😊

[@happyfamilylifescreations]

really understandable good video

[@TheFinanceStoryteller]

Glad it helped! 🙂

[@artisamcdonald5374]

great information

[@TheFinanceStoryteller]

Thank you, Artisa! :-)

[@mukhtarmaxamedaxmed3129]

Its good explaination realy

[@TheFinanceStoryteller]

Happy to hear that!!!! Thank you for watching and commenting.

[@user-ci6zf6iz7r]

I like the way you explained that. I suggest to add some real cases. Overall it was great

[@TheFinanceStoryteller]

Thank you very much for the kind words!!! As follow-up, you might also enjoy my video on DSO Days Sales Outstanding of Accounts Receivable, that includes some real world anecdotes: kzbin.info/www/bejne/mqaxYXV3jp6EbtU

[@vnpikachu4627]

Great video 👌

[@TheFinanceStoryteller]

Thanks 👍

[@chaithraleela1483]

Good Explanation Sir

[@TheFinanceStoryteller]

Thank you!!!!

[@ujwalkandimalla9313]

Wonderful

[@TheFinanceStoryteller]

Thank you, Ujwal!

[@vigilantone2538]

This will be a great help for interview tomorrow. Thank you. 😊❤

[@TheFinanceStoryteller]

Wishing you lots of success in the interview! The sequel to this video might also be interesting for you to watch: bad debt accounting kzbin.info/www/bejne/p2i6maWVdpmXqKc

[@manishthesaint]

Excellent

[@TheFinanceStoryteller]

Thank you! 🙂

[@shaungorham7959]

West Virginia, Cool.

[@happyfamilylifescreations]

Can you be able to guide me a simple video on hw to do book keeping in payroll side for entry into payroll, as well on taxing files yearly.thanks alot

[@TheFinanceStoryteller]

Great suggestion, but I have no experience in that area.....

[@colleen8927]

Thanks sir

[@TheFinanceStoryteller]

You're welcome, Colleen!!!

[@Jerry-mp2xx]

Hello sir, can i ask , is trade receivable under revenue in SOCI? , how about trade payable is it under current liability?

[@TheFinanceStoryteller]

Hello Ibrahim! I have no idea what SOCI is. Trade receivables are in current assets on the balance sheet, while trade payables are in current liabilities: kzbin.info/www/bejne/gKiXhZSfhZllhpY

[@natalkakrvs]

Can you please do a video on Account Journal entries and regular journal entries

[@TheFinanceStoryteller]

Hello Natalia! I am not sure I understand the difference. Can you describe more clearly what you are looking for? Can be in Russian too, my friend can translate for me. :-) In the meantime, here is my video on debits and credits that might help you: kzbin.info/www/bejne/pF7PdJdpib90bq8

[@barhamkhalid8564]

I am from Kurdistan Region. i did understand with your video. Thanks a lot.

[@TheFinanceStoryteller]

You're welcome! Greetings from The Netherlands. Thank you for watching! :-)

[@kenjideleoz3045]

The video sound is pretty good, beyond my imagination

[@TheFinanceStoryteller]

Nice to hear that! 😉

[@Heartie_adiepena]

Please I received a payment but it's relate to last year and the books from last year are closed. The debtor applied credit note which reduced to total receivable. Since last year is closed am not able to directly reconcile. Which journal entries can I make now to clear the balance? Thanks as always I will be expecting your input

[@TheFinanceStoryteller]

If you receive a payment, I would suggest to debit cash and credit accounts receivable in the current period.

[@Heartie_adiepena]

@@TheFinanceStoryteller thank you very much😊👍🏾

[@shraddhanikumbh7759]

Their is a job in congnizant now related accounts payable and receivable process should i for account job but i have no practical experience in accounting

[@TheFinanceStoryteller]

I can't decide that for you, but it might be a good entry job into accounting. If you have good attention to detail and a logical mind then it could be a good match. A main part of the role is likely to involve purchase order matching: kzbin.info/www/bejne/rH2TiXh-fr-ers0

[@bahar.around.theworld]

are the videos based on IFRS or the US standard?

[@TheFinanceStoryteller]

Most of the videos apply to both. In the case of A/R and A/P, the differences between countries is mostly linguistic. Brits would use "debtors", Americans "receivables" or "accounts receivable". Same for "creditors" versus "payables" or "accounts payable". Many of my case studies of financial statements of real world companies relate to companies that use US GAAP: kzbin.info/www/bejne/gJCUd2t9pLGCf5o&pp=gAQBiAQB

[@Singh90419]

Hello Sir, Thank you for such wonderful video on AP & AR. Could you please also make video on P2P process and it's journal entries.

[@TheFinanceStoryteller]

Thank you, Chinmay! Maybe my video on purchase order matching can help you: kzbin.info/www/bejne/rH2TiXh-fr-ers0

[@haretztj4682]

so basically A/P: wat u owe A/R: wat u own(or someone owe u)

[@haretztj4682]

A/P: usually creditor A/R: usually debtor aite now i got it

[@TheFinanceStoryteller]

Correct!

[@manishthesaint]

Are u also giving coaching for CPA?

[@TheFinanceStoryteller]

Nope, but I do have more than 200 videos in total on my channel that could help you! And I tend to reply fairly quickly to questions that are posted on a specific video.

[@SuryaBudimansyah]

03:06 "An example of working capital management" Why do you say that? I know that working capital is like current assets minus current liabilitie, but I don't understand what you said it, is it because tha acc payables go up?

[@SuryaBudimansyah]

Update: I watched your Working Capital and Working Capital Management video, and the way you define WC there makes sense to me and I'm less confused now So is it safe to say that Coca cola used their WC to maximize profitability?

[@TheFinanceStoryteller]

Hi Surya! Love it when you answer your own questions! 😉 Profitability is revenue minus expenses. Changes in working capital have an effect on the cash flow of a company, not directly on its profitability. Retailers like Amazon and Walmart have a low return on sales, and a very high assets turnover (due to their excellent working capital management). See also my example on Return On Assets: kzbin.info/www/bejne/aJubk5mIbbCkgJI

[@zangcs]

with regards to account inventory,can we replace it with purchase account instead

[@TheFinanceStoryteller]

Hi! I don't understand your question. Can you rephrase it?

[@zangcs]

@@TheFinanceStoryteller we were never taught abt inventory a.c..,but always refer to purchase n sales a.c...when comes to transaction involves stock/inventory...maybe differences of American accounting n British accounting.hope u can explain

[@TheFinanceStoryteller]

Nope, I can't. Even though I am from the Netherlands, I have worked mostly with American companies, so am used to that terminology.

[@zangcs]

@@TheFinanceStoryteller it's ok then,tq

[@TheFinanceStoryteller]

Hello again! I did some more thinking and reading on this. I am used to companies that apply perpetual inventory accounting, whereas using the purchase account is part of applying the period inventory accounting method. Do a search on those terms "perpetual vs period inventory accounting" and you will find videos/articles from other channels explaining it.

[@arundevadiga105]

Iam from India..here we write assets on right side and liabilities on left side of the balancesheet....

[@TheFinanceStoryteller]

Thank you, Arun! I was not aware of that, very interesting!

[@flavio___lira]

🙌🙌🙌

[@TheFinanceStoryteller]

Not sure what the emoticons mean, but I hope you enjoyed it!

[@flavio___lira]

@@TheFinanceStoryteller haha, to me those mean praise! Great work as always!

[@Mrumh1811]

😭😭😭❤️❤️❤️❤️❤️❤️❤️ Thanks

[@TheFinanceStoryteller]

Hope the video was helpful!

[@roadheaven6475]

Accounts receivable factoring, please!

[@TheFinanceStoryteller]

Discussed in my working capital management video 😎: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@roadheaven6475]

@@TheFinanceStoryteller thanks for you!

[@austin9186]

Accounts received? But it’s not what you think

[@TheFinanceStoryteller]

Yep! The nuance is important. Received (collected) is not the same as receivable (to be received).

[@cuongle-qn8dk]

Some segments in the video are stamped not adjacent to each other

[@TheFinanceStoryteller]

Thanks for highlighting that.

[@faresbaalbaki6169]

although the message is clear ..... some info are wrong .. you put equity under liabilities ;that is completely wrong 0:57 please change it . you made doubt me my knowledge

[@TheFinanceStoryteller]

Thanks for the feedback, Fares! It is a problem in the English language. Sometimes the word "liabilities" is used to indicate the whole right-hand side of the balance sheet (the "broad" use), at other times it is used to only indicate money owed to creditors (banks, suppliers, etc. - the "narrow" use). You are correct that in the "narrow" sense of the word, the accounting equation states that assets = liabilities + equity. As far as I know, there is no separate word in English for the right-hand side of the balance sheet. In French, for example, the left-hand side is called "les actives" and the right-hand side "les passives", there is no equivalent for that in English. In subsequent videos, I have kept a clearer distinction, for example in this review of the balance sheet: kzbin.info/www/bejne/m3rNdJSbg9JgjM0

[@user-jr4fc4th8c]

hi

[@TheFinanceStoryteller]

Hello.

[@longnguyenvan2558]

The video sound is pretty good, beyond my imagination

[@TheFinanceStoryteller]

Nice. Did you like the content as well?