The basics of accounts receivable and payable

Accounts receivable (also known as AR) represents all the funds owing from customers and other creditors and is entered as a current asset on a balance sheet. Accounts payable (also known as AP) represents the sums owed for items or services purchased from suppliers and other creditors. It is entered as a current liability on the balance sheet.

Accounts receivable and accounts payable are fundamental accounting principles. In effect, they’re opposite sides of the same coin. Every company must know its short-term liabilities and, in balance, how much money is due to flow into the company over the same period. Together, they enable a company to monitor how the business is performing and assess current and future needs.

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Accounts receivable

Accounts receivable means everything that you have invoiced and is pending payment from the customer. Invoices for products or services will reflect the agreed terms when the purchase order or contract was arranged.

A typical payment term is 30 days, but may be up to 90 days. If a business wants an invoice paid immediately, invoice finance is one way to unlock accounts receivable.

A deposit is sometimes required before full payment, but the usual practice is for the accounts receivable team to invoice the customer once the goods or services have been delivered. The invoiced amount, and terms, will be recorded in the accounts receivable ledger. Once the customer has paid, the transaction is no longer listed as a receivable. If payment is overdue, a collection team may follow up.

Accounts payable

Accounts payable means all the short-term due payments that a business owes to its trading partners. These debts will be recorded in an accounts payable ledger when an invoice is received for the agreed purchase of the goods or services.

Payment will follow the terms of the original contract, with 30 days being the standard term. Accounts payable teams are responsible for ensuring the accurate and timely processing and payment of invoices. A wide range of items can be included in accounts payable, such as leasing and a business loan from a financial provider, but employee wages will be treated separately.

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What’s the difference between accounts receivable and accounts payable?

From the above, it’s clear that accounts receivable and accounts payable play a vital role in the life of a company and distinguish assets from liabilities. Here is a summary of the differences between the two accounts:

Accounts payable versus accounts receivable

Why accounts receivable and payable are important

Good financial management is at the heart of every successful business, and the careful division between accounts receivable and accounts payable will promote liquidity and financial stability.

Timely payments are crucial to cash flow and for working capital, which is the difference between current assets and current liabilities on the balance sheet. For lenders and potential investors, accounts receivable and accounts payable are a clear indication of a business’s financial health and future performance.

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