4.3 Other Payables and Other Receivables

This section explores other payables (amounts owed to others) and other receivables (amounts owed by others) and their importance in matching costs and revenues.

Understanding Payables

Payables represent amounts a business owes to external parties. These are liabilities on the balance sheet.

Examples of Other Payables:

• Accrued expenses (e.g., salaries owed to employees for work already done but not yet paid)
• Interest payable on loans
• Dividends payable to shareholders
• VAT payable (Value Added Tax)
• Rent payable

Understanding Receivables

Receivables represent amounts owed to a business by external parties. These are assets on the balance sheet.

Examples of Other Receivables:

• Sales on credit (amounts owed by customers for goods or services sold but not yet paid)
• Interest receivable on investments
• Dividends receivable

The Importance of Matching Costs and Revenues

The matching principle is a fundamental accounting concept. It states that expenses should be recognized in the same period as the revenues they helped to generate.

Why is this important?

• Accurate Profitability Measurement: Matching ensures that the profit or loss for a period accurately reflects the performance of the business during that period.
• Better Decision Making: Accurate profitability information is crucial for management to make informed decisions about pricing, cost control, and future investments.
• Compliance with Accounting Standards: The matching principle is a key requirement of Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Example: Matching Costs and Revenues

Consider a company that sells goods on credit. The revenue is recognized when the goods are sold (or when the event occurs that indicates revenue has been earned). However, the cost of those goods (e.g., the cost of purchasing inventory) is an expense that should be recognized in the same period.

Table illustrating the matching principle:

Period	Revenue	Cost of Goods Sold	Gross Profit
2023	$100,000	$60,000	$40,000

In this example, the $40,000 gross profit is calculated by matching the $100,000 revenue with the $60,000 cost of goods sold in 2023.

Accounting Entries

Here are some example journal entries for other payables and receivables:

Other Payables

Example: To record an increase in accrued salaries.

Debit: Salaries Expense $5,000

Credit: Salaries Payable $5,000

Other Receivables

Example: To record a sale on credit.

Debit: Accounts Receivable $12,000

Credit: Sales Revenue $12,000

Assessment Questions

1. Explain the difference between a payable and a receivable.
2. Why is the matching principle important in accounting?
3. Give three examples of other payables and three examples of other receivables.
4. Describe how a company would record a sale on credit and the corresponding impact on its accounts.