Accounts Payable Vs Accounts Receivables

Accounts Payable vs Accounts Receivables

Running any business properly requires a good understanding of basic accounting principles. One of the core areas of accounting that needs to be understood is the difference between accounts receivable (AR) vs accounts payable (AP). Knowing the nuances between the two can help set up better procedures and secure better financial health for the business.

What are Accounts Payables?

Accounts payables refer to amounts that are owed from the business to vendors, suppliers, and other external entities. Accounts payables signify all the short-term debts of a business. These payments need to be settled within a certain period of time. Failure to pay in a timely fashion can cause the business to damage its creditworthiness rating.

What are Accounts Receivables?

Accounts receivables, on the other hand, constitute money owed to the business by its customers for products or services already given to them. This is nothing but the total outstanding money that is owed to the business as shown in the balance sheet. Uncollected payments from customers can also be shown under accounts receivable.

Features of Accounts Payable and Accounts Receivable

When comparing accounts payable and accounts receivable, there are a few key features to consider:

1. Nature: The nature of accounts payable is the outgoing of the business and accounts receivable is the incoming of the business.

2. Time: The time taken for account payables to be cleared is shorter than compared to accounts receivables.

3. Records: Both accounts payable and accounts receivable appear as liabilities in the balance sheet. Accounts receivable appear with more details such as customer name and amount due whereas payable is more general.

4. Time Period: The period of accounts receivable is usually longer than accounts payable.

5. Invoices: Invoices should always be sent out for accounts receivables, whereas with accounts payable invoices can be waived if the payment is made in cash.

Accountable vs Non-AccountablePayables

Payables are usually classified as either accountable or non-accountable. Accountable payables require a document from the vendor or supplier clearly indicating the details of the expenditure. For example, if a business purchases merchandise for resale, then it will require a vendor bill. Or if a business purchases raw material, then it will require a warehouse bill. On the other hand, non-accountable payments do not require any such documents.

The most common types of non-accountable payables are insurance payments, electric bills, water bills, and salaried works. All these payments are made directly to the provider, and often a proof of payment is enough to satisfy the accounting requirements.

Recording Accounts Payable and Accounts Receivable

When recording accounts payable and accounts receivable, there are several important steps to make sure everything is accounted for properly. First, accounts payables need to be entered into the accounts payable ledger with the date, vendor name, items purchased, and the total amount due. Accounts receivable need to be recorded into the accounts receivable ledger with the customer’s name and details of the invoices.

The next step is to account for the payments both received and issued. Every payment should be documented with the details of the transaction such as the payment type and amount. At the end of the accounting period, both the accounts payable and accounts receivable ledgers should be balanced, which helps to track the outstanding payments and check if any amounts have been recorded incorrectly.

Controlling Accounts Payable and Accounts Receivable

Having good control over both accounts payable and accounts receivable is vital for the success of any business. To prevent any discrepancies between the two, and to ensure that the entries are accurate, a few steps need to be taken:

1. Strict approval workflow for all purchase orders
2. Build a clear payment process for both accounts receivable and accounts payable
3. Reconciliation of accounts both payable and receivable on a monthly basis
4. Addressing discrepancies between two accounts early on
5. Prompt payment and collection of invoices

By following these simple steps, it’s easier to ensure both accounts payable and accounts receivable are properly accounted for.

Difference Between Accounts Payable and Accounts Receivable

When it comes to differences between accounts payable and accounts receivable, they can be summed up with the help of the following points:

1. Accounts payable refer to the money the business owes to its suppliers, vendors, and other entities. Accounts receivable refer to money customers owe to the business.

2. Accounts payable are said to be the obligations of the business to its external entities. Accounts receivables are assets for the business.

3. Accounts payable need to be settled quickly and have shorter terms than receivables. Receivables, on the other hand, can be stretched for longer terms depending on the type of business.

4. Accounts payables are mostly a short-term source of finance, whereas receivables can be used as long-term financial tools.

5. Accounts payable are usually non-interest-bearing, whereas accounts receivable generate interest if its payment is not received on time.

Having a good understanding of accounts payable vs accounts receivable helps businesses set up better procedures in terms of payments and collections. By taking proper care of both accounts payable and receivable, businesses can maintain a better financial position and meet their liquidity goals.