Accounts payable are amounts a company owes because it purchased goods or services on credit from a supplier or vendor. Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer. Accounts payable are liabilities. Accounts receivable are assets.
Let's assume that Company A sells merchandise to Company B on credit. (Perhaps the invoice states that the amount is due in 30 days.) Company A will record a sale and will also record an account receivable. Company B will record the purchase (perhaps as inventory) and will also record an account payable.
Our example reminds me of an old saying, "There are two sides to every transaction." In accounting we also expect symmetry: Company A has a sale and a receivable, Company B has a purchase and a payable.
In accounting the term aging is often associated with a company's accounts receivable. Accounts receivable arise when a company provides goods or services on credit. For example, a company may allow its customers to pay for goods or services 30 days after they are delivered. If customers do not pay as agreed, the company could experience a cash problem.
In order for the company to minimize its cash flow problems and potential losses from customers who are unable to pay, companies will routinely prepare an aging of accounts receivable. The aging report will list each customer's outstanding balance and will then sort the total amount into columns such as: Current, 1-30 days past due, 31-60 days past due, 61-90 days past due, 91-120 days past due, and 120+ days past due. The aging of accounts receivable allows managers to quickly see which customers are behind in meeting the agreed upon terms. An aging is usually a standard feature of accounting software.
Some companies also do an aging of accounts payable. This aging sorts the accounts payable amounts by due dates.
Accounts receivable are usually current assets that arise from selling merchandise or providing services to customers on credit. Accounts receivable are also known as trade receivables.
Receivables is the term that refers to both trade receivables and nontrade receivables.
Nontrade receivables are receivables other than accounts receivable. Some examples of nontrade receivables include interest receivable, income tax receivable, insurance claims receivable, and receivables from employees.
An account payable is an obligation to a supplier or vendor for goods or services that were provided in advance of payment.
To illustrate an account payable let's assume that Joe's Plumbing Service provides XCorp with repair services on August 29 and agrees to bill XCorp. On August 31 XCorp receives an invoice from Joe's for $900. The invoice states that the $900 is due within 30 days. After reviewing and approving the invoice, XCorp enters Joe's invoice into its accounting records with a credit to Accounts Payable and debit to Repairs and Maintenance Expense.
Until the invoice from Joe's Plumbing Service is paid, Joe's invoice serves as the supporting document for XCorp's accounts payable and also as a supporting document for Joe's accounts receivable.
The days' sales in accounts receivable ratio, also known as the number of days of receivables, tells you the average number of days it takes to collect an account receivable. Since the days' sales in accounts receivable is an average, you need to be careful when using it.
The calculation for determining the days' sales in accounts receivable is the number of days in the year (usually 360 or 365 days is used) divided by the accounts receivable turnover ratio for a specific year. If a company's accounts receivable turnover ratio was 10, then the days' sales in accounts receivable is 36 days (360 days divided by the turnover ratio of 10).
Since the accounts receivable turnover ratio used in the days' sales in accounts receivable was based on 1) the credit sales during a one-year time period, and 2) the average accounts receivable balances during that one-year period, the 36 days calculated above is an average. It is possible that within the accounts receivable there are some accounts which are 120 days or more past due. This information might be hidden by the average, because the average included some accounts that paid early. Therefore, it is best to review an aging of accounts receivable by customer to understand the detail behind the days' sales in accounts receivable ratio.