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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
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up front. so you cut a deal with your suppliers to pay them six months after [forklift]
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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]
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right there 50 million. well as sales come in, yeah cha-ching, cha-ching, cha-ching,
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you feel ready to pay off at least one of your suppliers, and send them a check
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for a million bucks .and that cool million shows up as an expense on your [hands exchange check]
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income statement, and your accounts payable figure declines by a million
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bucks .your sales end up being solid you quickly sell 500 units you built for 80
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grand each and that's half your stock. unfortunately the buyers can't pay you
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right away they promise to pay you in writing within 120 days of taking [hand signs document]
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possession of the Schmesla. so that's 500 Schmeslas for 80 grand each
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giving you 40 million bucks worth of accounts receivable that you show on
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your books right there. well a few months go by and you start to collect. some
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buyers pay early a quick 500k comes in as buyers pay off their Schmeslas, and [men in suits]
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that 40 million in accounts receivable is now 35 million, and that five million
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plops right in your cash account at the old Bank of America. you feel good [bank of America logo]
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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
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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
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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
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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]
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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
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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]
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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
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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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