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Finance: What are Accounts Payable and Accounts Receivable? 111 Views


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What are accounts receivable and accounts payable? Accounts receivable and payable are figures that show up on a company’s balance sheet. Accounts receivable includes all payments the company is owed (like purchasers buying on credit). On the other hand, accounts payable includes what they owe to others.

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Transcript

00:00

Finance- a la shmoop what are accounts payable and accounts receivable? easy. they're

00:09

accounts. they live on the balance sheet right here and here. accounts payable [balance sheet shown]

00:13

refers to bills you owe for stuff you bought or committed to buy. accounts

00:17

receivable refers to stuff you sold, and are you know waiting to be paid for.

00:26

you're the CEO of Shmesla. you make flying electric cars. you've built a

00:34

thousand of these units and they're ready to sell. the machine takes five

00:37

grand worth of aluminum ,eight grand worth of computers, three grand for the

00:42

blades, and so on. so flying schmess la in total costs 50 grand to build then sells [equations]

00:47

for about 80 grand each. only problem with your build of inventory you didn't

00:51

have the money to pay for all of the equipment that goes into the Shmesla

00:55

up front. so you cut a deal with your suppliers to pay them six months after [forklift]

00:59

they've shipped you that construction materials. by building a thousand units

01:03

you'll spend 50 million bucks on raw materials ordered on credit, which shows

01:08

up on your balance sheet as a short-term liability, in the accounts payable slot [balance sheet]

01:13

right there 50 million. well as sales come in, yeah cha-ching, cha-ching, cha-ching,

01:18

you feel ready to pay off at least one of your suppliers, and send them a check

01:23

for a million bucks .and that cool million shows up as an expense on your [hands exchange check]

01:29

income statement, and your accounts payable figure declines by a million

01:34

bucks .your sales end up being solid you quickly sell 500 units you built for 80

01:39

grand each and that's half your stock. unfortunately the buyers can't pay you

01:44

right away they promise to pay you in writing within 120 days of taking [hand signs document]

01:48

possession of the Schmesla. so that's 500 Schmeslas for 80 grand each

01:52

giving you 40 million bucks worth of accounts receivable that you show on

01:56

your books right there. well a few months go by and you start to collect. some

02:00

buyers pay early a quick 500k comes in as buyers pay off their Schmeslas, and [men in suits]

02:05

that 40 million in accounts receivable is now 35 million, and that five million

02:10

plops right in your cash account at the old Bank of America. you feel good [bank of America logo]

02:15

about the business and hate having accounts payable, so you take 4 million

02:19

of that 5 million bucks in cash, and well you pay some bills you pay down the 49

02:24

million you owed ,you now be 45 million in accounts payable.the contracted for

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payments of the Shmeslas all come in and another 35 million dollars comes in [men stand by stacks of cash]

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the door, taking away all of the remaining thirty five million dollars in

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accounts receivable so that account now goes to zero, and that thirty five

02:42

million bucks well it gets dumped into your cash account, which now has 36

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million dollars in it. why well because you had a million dollars sitting there

02:51

from the first set of payments remember? you still owe 45 million bucks in your

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accounts payable but you can bring that obligation down fast by paying 30 [hands exchange check]

02:59

million down immediately and make your suppliers dance. so what are the key

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factors of your balance sheet at this point? well you have five million in cash

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nice asset that cash there. you have five hundred cars yet unsold you think you

03:13

can get 80 grand each for them or 40 million dollars in revenues to you. you

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hold them as inventory on the asset side of the balance sheet right here. you are

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no longer owed anything because all the buyers who bought your first 500 cars [car flies through the air]

03:26

have now paid you. and while you owe another 15 million bucks to your

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suppliers to clean them up so don't start strutting around like you're Elon

03:34

Musk just yet you've still got a ways to go before Schmesla Galactic can found

03:39

its first colony on Mars. schmooping in space yeah it's a dream come [man in space suit meets alien]

03:44

true.

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