The Importance of Accounts Receivable and Accounts Payable

The Importance of Accounts Receivable and Accounts Payable

What are Accounts Receivable and Accounts Payable? It’s an accounting term that refers to accounts of money owed by the company to the business’s suppliers, or accounts of money owed by the business to its customers. While these two terms are used interchangeably, they have important differences in their purpose, use, and why it’s important to keep track of them in your business. This article will help you understand the difference between Accounts Receivable and Accounts Payable, why it’s important to pay attention to both of them, and how you can use them in your business.

What is Accounts Payable?

Accounts payable is money that a business owes to its suppliers for goods or services provided. It’s part of the broader Accounts Payable (AP) sub-ledger.

The AP sub-ledger shows all financial transactions between an organization and its creditors, including accounts payable. It's known as payables for short; also refers to payments owed by one company to another, such as a monthly

telephone bill from your phone service provider. This is distinct from Accounts Receivable, which are amounts owned to you. This comes into play when you purchase something on credit card—you now own that balance, i.e., they owe it to you (not vice versa). But both accounts fall under Accounts Payable in most organizational structures because they impact how much cash available at any given time.

Understanding Accounts Receivable You can’t run a business without understanding how it works. The accounts receivable process is one that has to be managed correctly in order for your business to succeed. If you fail to pay your creditors on time, there are consequences; but if you focus too much on paying them late, then there are consequences as well. It’s a balancing act with account receivables.

Understand what they are and why they matter, so you know how to manage your accounts receivable properly. To understand accounts receivable, you have to understand accounting. Accounts receivable relates specifically to customers who haven’t paid their bills yet. At one point or another every business will sell something and not get paid for it right away. These unpaid

invoices are considered accounts receivable—that means when customers make purchases from your company, they buy from their credit card or other type of payment plan.

How Does Accounts Payable Work?

To know how accounts payable works, you first need to understand what accounts payable is. The balance sheet lists all of a company’s assets, liabilities, and net worth in two columns: one for assets (the left) and one for liabilities (the right). If there are more assets than liabilities then there is a positive net worth. If there are more liabilities than assets then there is a negative net worth. In either case, accounts payable occurs when cash payments from customers exceed cash collections from invoices from suppliers of materials or services. Accounts receivable occur when cash collections from invoices from suppliers exceed customer payments. This means that both accounts receivable and accounts payable must equal zero on a company’s financial statements—otherwise, something has gone awry

somewhere along the line. When accounts payable balances become too high, it could be a signal that your company is using more material and services than it can afford. Ideally, your business will pay its bills within 30 days of receiving an invoice from a supplier. After 60 days without payment, most suppliers will probably stop providing services or selling products to your company until they receive payment. Accounts receivable are handled much in the same way; if accounts payable are becoming larger every month due to late payment, chances are accounts receivable also have unpaid debtors who aren’t paying their bills on time.

SOURCE: Difference Between Accounts Receivable & Accounts Payable Management