Although it may seem simple to distinguish between accounts payable and accounts receivable, these are two important concepts in company accounting. For this reason, learning different concepts and their usefulness is necessary.
As we will see throughout the article, in both cases, they are fundamental accounts to understand a company’s accounting. This type of account is not always well taken care of. Not paying attention can lead to poor control of your accounts and finances.
What is an account payable?
An account payable or AP is the name given to reports in a company’s general book. They indicate the obligations to pay debts to creditors or suppliers. In short, it is an account that reflects the money your company owes to other people.
What is an account receivable?
An account receivable or AR is the invoice or invoices owed by customers. It can be represented quite clearly by the lines of credit that the company has extended to customers. This way, a customer can make a deferred payment on products or services contracted.
Differences between accounts payable and accounts receivable
The main difference is that while the bill payable is made up of money that the company owes to third parties, the account receivable is made up of money that third parties (in this case, customers) owe to the company.
But, there are more differences. Another important difference is that an account receivable will be considered a current asset while an account payable is a current liability. The difference between current assets and current liabilities is that the account receivable is converted into cash within a certain period. On the other extreme, the charge payable is a current liability because it represents money owed by the company to the creditor.
Profit applied to accounts payable and accounts receivable
Many utilities can be used for accounts payable and account receivable. As we have told you, these are two very important accounting concepts for any business. This importance is greater in small companies where large accounting programs and equipment are not used.
A late payment can be a serious cash-flow problem for most small businesses. Delaying debt affects cash flow. By reducing cash, working capital is tied up on balance sheets.
Accumulating late payments reduces cash flow and takes resources and time to collect and follow up on payments due.
On the other hand, it is also considered important to quantify the money that remains to be collected for financing purposes. Any investment process can delay if this tied-up capital is not available. But, at the same time, accounts receivable can be used as a basis for financing.
You are trying to improve cash flow when you do account receivable optimization. Therefore, it is very important to keep good track of these accounts and to have a healthy relationship between what you have to collect and what you have to pay.
Keys to managing accounts correctly
Many companies pay too much attention to accounts receivable and less to accounts payable. However, in any healthy accounting system, it is important to maintain awareness of both formats.
Maintaining the health of both types of accounts is important to obtain good accounting optimization.
The first key to this is the accounts receivable automation option. Today, many software tools allow this automation. This way, the entire manual process of tracking and constant attention to accounts receivable is eliminated.
Another highly recommended key to account management is improving invoicing speed. Invoicing processes can become quite complicated. These complications can come from delaying the issuance of invoices, making mistakes in addresses, etc. Streamlining all these processes is very important. That implies a good client data follow-up and a fast invoice-issuing process.
On the other hand, negotiating payment terms is also important. Accounts payable optimization is a basic key since, let’s remember, it is the one that manages the collection of deferred payments from our debtors. Good deferred payment negotiations will consider all relevant aspects of the company and its accounting.