Accounts Payable Vs. Accounts Receivables: What’s The Difference?

Consistency in an organisation means maintaining a steady cash flow. Every business owner needs to understand the basics of financial management for the smooth running of operations. Accounts payable and accounts receivable are two technical terms that help businesses track cash inflows and outflows to determine the company’s overall financial health.

Considering the yin and yang of a business, managing a healthy equilibrium of revenue and expenditure can help you make informed decisions for sustained growth. In simple terms, accounts payable refers to the money you owe to suppliers and vendors, while accounts receivables is the amount customers owe you for the purchase of goods and services.

In this guide, we’ll help you understand accounts payable and accounts receivable, and their key differences. Whether you have a cafe or a web development business, ensure you hire the best bookkeepers in Melbourne who can keep your business finances on track to prevent losses and penalties.

1. What is Accounts Payable (AP)?

Accounts Payable, or AP, is the amount your business owes to suppliers, service providers, and other creditors. It covers short term debts, such as goods or raw materials bought on credit. It is your obligation that needs to be paid within 30 to 90 days to keep your company running smoothly while managing your business expenses.

In simple words, accounts payable refers to any outstanding debts and bills your business is responsible for paying within a short period. It doesn’t include long term debt like a mortgage loan or payroll.

2. What are the Examples of Accounts Payable?

Here are some of the common examples of AP:

• Supplier invoices for raw materials or stock
• Utility bills, such as water, internet, or electricity
• Lease payments for commercial real estate

It is essential to manage accounts payable by making payments on time and avoiding late fees. This will also help you maintain relationships with suppliers and vendors.

3. What is Accounts Receivable (AR)?

Accounts receivable is the money that customers owe your business for products or services that have been invoiced. It refers to the sales your company has made but has not yet been paid for.

The total amount of all AR is listed by professional bookkeepers in Melbourne on the balance sheet as assets. It is the money customers owe for the use of products and services on credit.

In simple terms, when a company delivers goods or services to a customer, the AR team invoices the customer and records the amount as an account receivable until payment is made.

4. What are the common examples of Accounts Receivables?

Common examples of AR include:

• Unpaid customer invoices
• Customers are invoiced post deliver
• Subscriptions are billed in arrears

Make sure you collect accounts receivable as quickly as possible to maintain a positive cash flow. If receivables are delayed, businesses find it difficulty in covering expenses or expand their operations.

5. Accounts Payable vs Accounts Receivable: Know the Difference

For every purchase or sale, a company either issues or receives an invoice. It is essential to record both in books to avoid penalties, late fees, or cash flow instability. To better understand key differences, have a look at the following aspects:

• Role in Balance Sheet: AP vs AR

Accounts payable is listed as a liability on the balance sheet because it represents funds your business owes to suppliers. It helps you know your financial commitments you need to pay within 30 to 90 days.

Accounts Receivable, on the other hand, is recorded as a current asset on the balance sheet, as you need to owe money to customers for goods and services provided. It is considered income you are expecting to receive in the short term.

• Time and Cash Flow Aspects: AP vs. AR

When you clear your accounts payable, it reduces your cash. Therefore, timing plays a key role. Make sure you pay bills on time to boost healthy relationships with suppliers while maintaining your cash flow. Believe it or not! Late payments can ruin relationships, while paying too early can lead to an unnecessary cash deficit.

On the other hand, collecting accounts receivable can lead to a cash surplus. However, delayed payments can put strain on cash flow. So, ensure you regularly track outstanding customer invoices and follow up to ensure payments are received on time. This can save you from financial offsets or cash shortfalls.

As a responsible business owner, you should understand the key differences to prevent cash shortages. Accurate records of AP and AR also prevent unexpected losses or invoicing blunders. The best part is that keeping a track of both sides gives you insights into your company’s financial statements and overall health.

6. How to Manage Accounts Payable and Accounts Receivable?

There is no rocket science to maintain AP and AR in your bookkeeping books. You can do the following:

• Use the best accounting software, such as MYOB, Xero, etc to track incoming and outgoing payments
• Update your books frequently
• Book seasoned Melbourne bookkeepers to maintain accurate records
• Follow up on late payments to prevent small mistakes.
• Set clear payment terms
• Stay compliant with reporting standards

Wrapping Up

Accounts Payable and Accounts Receivable are the two crucial aspects of any business. It helps you track your company’s expenses and income. Both are equally crucial for understanding the cash flow and financial health in the long run. Make sure you manage them to reduce cash shortages and enjoy business growth and prosperity.