Are you running a small business? If so, then it is important to have as much information as possible regarding your accounting process. This includes understanding the key differences between accounts receivable and accountable payable.
What Are Accounts Payable?
Accounts payable refers to a current liability account. This will keep track of the money that you could owe to a third party. The third-party in question could be anyone from a bank to a company or a private individual that you borrowed funds from.
An example would be the purchases that you have made for goods and services from other companies. Accounts payable amounts will usually be due within a short period or immediately after they are processed.
What Are Accounts Receivable?
Accounts receivable are the opposite of accounts payable. This refers to payments that a third party owes to you. The parties in question are the same. It can include companies, banks, private individuals, and anyone else who might owe your business money. This could include companies that have purchased goods from your business but haven’t paid for them yet.
Key Differences Between The Two
While they might get confused sometimes, they are the exact opposite of one another. Accounts receivable is money you owe. Accounts payable is money that someone else owes to you from customers.
Accounts receivable are also considered to be a current asset. Accounts payable is a current liability.
The reason for this is that accounts receivable will be converted to cash in a year or under. In some cases, you will be offered a longer credit term which means that it could take longer to pay. However, this won’t usually be the case.
Why Is It Important To Understand
You might be wondering why business owners should be concerned about the distinction here. It’s important to understand that a lot of businesses do experience late payments. This can be a massive problem for small businesses because it can leave a company like yours out of pocket and in debt. Late payments will always lead to cash flow issues in your business where you won’t be able to pay for the purchases that you made to keep your company running effectively. Having an accountant will help you avoid these problems.
Some reports suggest that as much as 50% of small businesses in the UK could be suffering from the issues caused by late payments.
The way to solve this problem is to make sure that you do work to optimize the receivable process in your business. This means that you will be paid the money you are owed on time. This in turn will guarantee that you can cover the cost of your accounts payable.
There are numerous ways that you can manage this process more effectively. For instance, you might want to consider using an automated solution. With an automated system, you can guarantee that your invoice is handled immediately rather than getting delayed.
We hope this helps you understand the key differences between accounts receivable and accounts payable and why it matters.