hello everyone I'm Larry your professor for financial accounting and I want to take a few minutes to explain to you the general concepts surrounding accounts receivable and accounts payable we're not going to go into the details of how debits and credits are recorded for accounts receivable and accounts payable that is coming soon enough in this course right now I just want to make sure that people who haven't had much experience with this in business understand the concepts of what we mean by accounts receivable and what we mean by accounts payable and that will provide you with a good foundation for when we get to the way that things are recorded in detail in an accounting information system to explain this let's make pretend that I own a business a food supply business and then I sell to various restaurants so I've shown here here's my truck and I've loaded up my truck for the day and I'm taking my deliveries to twelve different customers today and I've pulled my truck up to the first delivery of the day one of my customers Joe who owns Joe's place this is a restaurant now Joe had put in an order for five thousand dollars worth of food supplies with me so I pull up the truck it's 9:30 he's my first delivery and I will carry into his restaurant $5,000 worth of goods and we will put all of those goods into his storage area and Joe in turn will give me a $5,000 check it's $5,000 check you'll pay me and then I will go on my way to the next client now at the end of the day when I bring my truck back and I come back to the warehouse then I go in to update my accounting records let's look specifically at what happened with this transaction with my customer Joe who owns Joe's place he gave me a $5,000 check well I'm going to record in my accounting records from this I can record that cash the $5,000 that he paid me of course I'll be depositing this in my bank account my business is bank account now what about Joe what's he going to record well he received $5,000 worth of goods $5,000 worth of supply so on his records maybe he records this as we'll use the term supplies we'll call the account supplies and he records $5,000 now maybe he didn't call it supplies maybe he called it inventory or food supplies regardless this is an asset account and he's recording that he has received $5,000 worth of supplies that he now has and I've got $5,000 worth of cash recording now this is if I do business with Joe on a cash basis but what if instead I do business with Joe on account if you haven't heard that term on account that terminology it means I'm granting Joe credit maybe I've been doing business with him for years and I'm willing to grant him credit of up to let's say $10,000 and the deal is I'm willing to deliver him these $5,000 worth of goods today he can sign for those but I will have a deal with him on account where he can pay me within will say how about 30 days that will be the deal I will expect payment from him in 30 days so Joe will not give me the cash I haven't received $5,000 in cash today he did not give me a check for $5,000 I delivered the goods I made delivery I earned that money but what I'm going to do is send Joe a bill I will send him an invoice that will clearly list everything that I delivered to him and also the total sum that he owes me which is $5,000 do pay paid to me within 30 days now since if I'm doing business on account with Joe when I return at the end of the day I don't have a $5,000 check to record I don't have $5,000 where of cash Joe has his $5,000 worth of supplies what am i instead going to record in my accounting information system I'm going to record this as accounts receivable to me these are accounts receivable of $5,000 I've earned that money and it is coming to me within 30 days but I don't have the cash yet now Joe owes me that money so what's he going to record for this on his books accounts anybody know the term for this payable he is going to record accounts payable of $5,000 to me it's a receivable why because that $5,000 I will be receiving it within about a month - Joe it's a payable he's going to have to pay me that money but the money has not yet moved because I'm doing business on account with general I'm giving him 30 days I'm giving him credit now let me ask you this what kind of an account is accounts receivable where would this show up if I put together a balance statement today where would this show up under the category that is assets accounts receivable we're talking an asset they're like cash but not quite as liquid as cash right accounts receivable is an asset how about on Joe's book on Joe's books accounts payable what our accounts payable he owes that money that is a liability to him okay so the receivable is an asset payable is a liability I'm on the receiving side so I record the asset Joe owes me the money so he is recorded a payable what is going to happen within 30 days when Joe pays me there's a day that he is going to send me the check he's going to send me that check for $5,000 what will happen on that day what will I do with the five thousand dollar receivable I recorded the Joe if he has sent me the money that's getting white that day now remember this is a month later and then I will record the cash on that day and by the way it when Joe sends me that money what will happen to this five thousand dollar payable the Joe's recorded that will be wiped to zero we're going to be getting into this very shortly of how this is all recorded using debits and credits right now we just need everyone to understand what we mean by accounts receivable and accounts payable accounts receivable it's an asset that is money I've earned that is coming to me but I have not yet received the cash and accounts payable that is money that is oh that is a liability now let's take this one step further what if Joe tells me when he places this order for $5,000 worth of goods you know I really need this this material Larry I mean it's critical to my business but I don't I have a cash flow problem right now I don't have the cash available to pay you this $5,000 within 30 days well what we can do is set up a more formalized agreement I'll ask him when do you when do you think you can get me this payment he says to me Oh about three months three months I'd be able to pay well okay I may be willing to do that but while I'm willing to grant him credit for 30 days to get that $5,000 to me I'm not really comfortable with him holding my $5,000 for three months that's an awful long time for me to finance for free his business so when I may ask Joe to do is to sign a note with me and term for that is a promissory note what I've sketched here is the most simple basic type of a strawman of a promissory note if you'd like you can do a search on the internet and take a look at some of the legal wording that would go into a full promissory note but let's keep this simple Joe is going to sign a promissory note so he's going to promise to pay Lari the $5,000 this is after I've delivered him the $5,000 worth of goods he's going to pay me the $5,000 and if he's going to be holding my money for three months I'm not going to do this interest-free I'm going to expect some interest on this so let's just say to keep it simple I want him to pay me annual interest of 10% on this money that he is holding for me and if Joe is going to sign this here he'll sign this at the bottom right here and the date of this the date I delivered the goods was June 1st of two thousand what ever I'm expecting him according to this deal to pay me we'll do this three months later it'll be on September 1st of this year so what this note does Joe has signed a promissory note with me I've delivered the $5,000 worth of goods to him if he could have paid me within the 30 days I would have simply just done this on account with him and billed him but since he can't pay me for 90 days I want some interest on this money so I've asked him to sign the promissory note he's promising to pay me the $5,000 with an additional 10% annual interest and he's going to pay that to me three months after I delivered the goods and that's going to be on September 1st of that year now without getting into this too much at this point can you tell me on September 1st what's the total that Joe is going to have to pay me he's going to have to pay me the $5,000 that he owes but what else does he owe me he's had my money according to this promissory note for three months I'm charging him annual ten percent interest while ten percent of five thousand dollars would be $500 if he held the money for the whole year but he's only held my money for three months out of 12 in a year that's one quarter of a year so he's additionally going to pay me another 125 dollars in interest on top of the five thousand dollars he owes me and we'll be getting into that later on in the course the point that we need to get out of this is that in addition to accounts receivable and accounts payable there are also other accounts that you will see listed known as notes receivable and notes payable notes receivable and notes payable if Joe signs a note with me for $5,000 instead of me recording 5000 under accounts receivable I will record that day notes receivable of $5,000 and Joe will record notes payable of $5,000 and again 90 days later 3 months 3 months later when all of this is paid off Joe will send me the cash that he owes me the $5,000 plus the interest and we will wipe my receivable and wipe my payable and I will record the cash and we'll show you later in the course how that's done so you see note receivable and notes payable very similar to accounts receivable and accounts payable just a little more formal and they typically involve some interest payment because we're talking a longer period of time that someone is holding our money and also maybe Joe doesn't sign the note with me maybe I'm not willing to extend a note to Joe he may go to the bank the local bank and say I need $5,000 to pay Larry for this delivery of goods and Joe may instead sign a note with the bank in that case the bank will have a note receivable with Joe and he'll have a note payable with the bank so I hope that helps everyone understand the difference between accounts receivable and notes receivable very very similar and accounts payable and notes payable but when you see the word receivable you know these things are assets payables liabilities ok and in a couple of weeks we'll see in much more detail how we record receivables and payables using debits and credits I hope that helps and good luck with your studying