The Major Differences Between Accounts Payable and Accounts Receivable

The Major Differences Between Accounts Payable and Accounts Receivable

Knowing the difference between accounts payable and accounts receivable is the key to helping business owners keep track of their accounts. While both are essential elements to keep accounts functions, they work very differently. The first step is to identify what accounts payable and accounts receiveable mean.

Accounts payable refers to an obligation that your company has to pay off debts to your creditors. Accounts receiveable is an invoice that reflects the amount of money owed to you by customers. Basically, accounts payable is looked at as a liability because it reflects what you owe. Accounts receivable is considered the opposite: an asset.

If accounts payable and accounts receivable are not tracked accurately it can cause a number of problems for your business. Late payments are often the culprit when the accounting process goes awry. According to government reports, nearly half of all businesses in the U.S. are chasing late payments. They often spend additional hours of manpower attempting to catch up. This extra manpower could be better served in other areas of the business including investing, funding new products, and other areas of growth.

A steady accounts receiveable process ensures that your business’s cash flow remains healthy. This way you always have enough funds to cover your expenses and won’t have to struggle.

The best ways to handle accounts payable and accounts receivable:

Nowadays, most companies are automating their accounts receivable. There are a number of different software programs such as Quickbooks that can streamline the process.

Finding a better way to invoice is also a key to eliminating errors. Make sure all of the pertinent information is included. Preparing invoices as soon as all work is completed.

Optimize and negotiate payment terms. Longer payment terms will free up cash.

Other basics to consider when dealing with accounts payable and accounts receivable:

Payables have no offset while receivables can have them.

There are also certain ways to record both accounts payable and accounts receivable to keep the books accurate. For both accounts payable and accounts receivable, the date, accounts explanation, reference, debit, and credit information should all be listed in the appropriate columns.

Another thing business owners must keep in mind is that there is a timeframe for receivable accounts. In most cases, 30 days is the time in which companies get invoices. After that, 60-90 days late fees are added. Both payables and receivables have a direct effect on the company’s cash flow.

Most businesses find themselves in hot water for failing to keep an accurate accounting of accounts payable and accounts receivable. It is good to have an accountant to monitor the company’s financial activities to keep the books in good order. It is also imperative to have some type of automated system to streamline the process.

Business owners who need more information regarding accounts payable and accounts receivable should contact a competent accountant for more guidance. A good money manager can help you keep track of all of your finances, which will keep you off the IRS radar.