Accounts Payable and Accounts Receivable

Accounts Payable and Accounts Receivable are two different things, however, people often get confused between the two. This is why we have curated this blog for you so that you can find the difference between the two. So, let's not waste time and get started with Accounts Payable vs Accounts Receivable . 

Accounts Payable - What is It?

AP or Accounts Payable is a liability account with the task of keeping track of the financial commitments of a company that are related to external parties. This account chronicles payments due to suppliers and vendors for goods and services bought on credit. With defined payment conditions and due dates each month, a normal example of an accounts payable situation is a mortgage, where a contract is agreed to pay back a loan in set installations over a certain period. 

Making early payments to suppliers can also result in discounts on the unpaid debt. Additional examples of accounts payable transactions include a variety of costs, taxes, and several kinds of short-term debt, among other things.

Accounts Receivable - What is it?

Accounts receivable (AR) is a current asset account that a company uses to record the amounts legally owed from consumers who bought goods or services on credit. Reflecting the expected cash inflow, this statement monitors all the money owing to the company from outside sources, that is, by third parties, thereby acting as a financial statement. 

By third parties, it is meant banks, individual customers, businesses, etc, that still have unpaid balances. One example of an accounts receivable transaction is interest receivable, which results from investments or funds kept in accounts that earn interest.

Distinction between Accounts Receivable and Accounts Payable 

Now that you know what both terms mean, let's move ahead with Accounts Receivable vs Accounts Payable and figure out the difference between them. 

It is imperative to draw a stark distinction between them on a business balance sheet, as one is a liability account and the other an asset one. Not differentiating between the two can cause imbalances, lower working capital, or even the appearance of bad debt, all of which can negatively impact the general financial statements of the firm.

How Do Accounts Payable Work?

Effective financial management requires five basic phases in the Accounts Payable Process. In bigger companies, these phases could take quite a while to complete: 

1. Receival, the first phase, is triggered by a company's receipt of a bill following the acquisition of goods or services from a supplier, indicating a demand for payment. 

2. Following delivery, the following action is to input the invoice into the accounts payable ledger. Often, this activity can be automated using cutting-edge technologies, including invoice scanning and optical character recognition (OCR), if the business uses accounting software. 

3. Matching Depending on the existing policies, the invoice may need to be reconciled with pertinent documentation, including inspection reports, shipping receipts, and purchase orders. 

4. Following a series of checks, the invoice is authorized to confirm that the payment is warranted and recognized as a genuine debt. 

5. The last stage is to make sure the invoice is paid for the proper amount and fast. Once the payment is processed, the matching entry should be deleted from the accounts.

How Does Accounts Receivable Operate?

Three basic procedures the AR team must take in order to guarantee payment comprise the straightforward accounts receivable (AR) process. These stages comprise, first, an invoice is promptly sent to the client once all services have been provided. 

Second, the team checks these invoices on a regular basis via a trial balance; should payment be late, they will send reminders and may escalate the issue with phone calls or collection activities. Finally, upon getting a payment, the AR department confirms the amount is right and properly notes it in the ledger as paid.

Conclusion 

Understanding these two basic ideas is vital for any company, especially for those just starting out and constantly engaging in credit transactions, sometimes referred to as on account. We hope Accounts Payable vs Receivable is clear to you after reading the blog. 

Always aim for prompt payments since knowing your responsibilities is essential. Not making payments can cause interest and damage to professional connections to accumulate. Improving these processes can hence greatly improve an organisation’s financial stability, free up cash flow, and finally increase income.