A Guide To Accounts Receivable And Accounts Payable

Bookkeeping is all about tracking accounts receivable and accounts payable. These two accounts inform the business owner about the capital coming in and going out in a period. The bookkeeper records both in the general ledger to maintain up-to-date books. However, when entrepreneurs double up as bookkeepers, they can make the mistake of misrepresenting transactions by mixing up the two accounts.  

Since they are recorded in the same manner, confusion is possible. However, muddling accounts can lead to greater problems like bad debt and diminishing working capital. Therefore, entrepreneurs must consciously try to understand the basic differences between them. Here is a guide to accounts receivable and accounts payable that can be useful for effective bookkeeping. This information will ensure correct calculations for the right financial decisions.

1. Understanding Accounts Receivable  

Accounts receivable is the amount that customers owe to the business for buying their products and services. It is considered a current asset for the business because it brings money into the organisation. Accounts receivable helps entrepreneurs identify the amount that they are expected to receive and it is removed from the ledger when the payment is made.

For example, a customer buys products worth $5,000 from the company and agrees to pay the amount in one month. The amount will be mentioned as accounts receivable in the ledger until it is paid by the agreed date. If the payment is delayed, the business can add a late fee to the original invoice.

2. Recording Process of Accounts Receivable

Accounts receivable are used by businesses where the customer does not make the payment upfront. The client may pay a small amount initially and the remaining over a period. The balance amount to be received from the customer is mentioned in the general ledger under current assets.

The process involves generating the invoice for the transaction and following up with the client to receive the payment by the due date. Bookkeepers in Melbourne use the information to identify the accounts receivable turnover ratio, which determines the ability of the business to quickly convert its accounts receivable into capital.     

3. Understanding Accounts Payable   

Accounts payable is the amount the business owes to vendors and suppliers for raw materials and stock purchased on credit. If the company has to increase its production or penetrate new markets, it must buy inventory on credit instead of making an upfront payment.    

Expert bookkeepers Melbourne keep track of the accounts payable and record them carefully. They use this account to improve cash flow by delaying payment for as long as possible. Efficient bookkeeping requires building strong supplier relations to get discounts and increase profits.     

4. Recording Process of Accounts Payable

Accounts payable are recorded as current liabilities in the general ledger because it is a debt for the business. The process begins with receiving invoices from the suppliers for the stock procured and verifying the order details. The authorised person must approve the payment to be recorded in the ledger.

Melbourne bookkeepers ensure the payments are processed according to the payment dates mentioned in the invoices received from suppliers. They can also ask for early payment discounts to reduce the expenses like invoice discounts offered to clients. After the payment, the entry is removed from the ledger.   

5. Significance of Accounts Receivable and Payable  

Tracking and recording accounts receivable and payable is essential for effective financial management. It gives a log of all the pending payments and income to understand the business’s financial health. Bookkeeping in Melbourne becomes streamlined through the management of these accounts by professionals. Clear communication is integral to managing the accounts, and experts can ensure consistent two-way flow without barriers.  

It ensures the business pays its bills on time without straining relations with suppliers and avoids late fee penalties. Also, bookkeepers are vigilant of the incomings and follow-up with clients who are delaying payments. They also maintain a positive relationship with customers to ensure they turn into loyal buyers because of their previous experience.

6. Managing Accounts Receivable and Payable

It is vital to hire experienced and reputed Melbourne bookkeepers who can take charge of processing payments before the due date without missing any entries. They must stay on top of the books to identify bad debts and turn them into income with perseverance and customer relationship management. The balance sheet of the business incorporates both accounts as liabilities and assets.  

The professionals use the financial data in the ledgers to prepare the budget and manage the cash flow. Thus, it is mandatory to maintain accurate records, which helps to comply with the legal regulations and understand the revenue generated by the business. Entrepreneurs who have to take out a loan can easily get funding by showcasing their ability to generate income and receive payments from clients without hassles.

Wrapping Up

Every business owner must understand the difference between accounts payable and receivable because it will help them to comprehend the balance sheet and forecast the cash flow. The guide given above can help in this regard effectively.