Accounts Payable vs. Accounts Receivable

Accounts Payable VS Accounts Receivable
Accounts Payable VS Accounts Receivable

Every organization should have strong financial accounting practices in place for proper financial management and ensuring cash flow. It is very important to have a clear understanding of the various aspects of business accounting when you are setting up your own business or are in the process of streamlining your finances.

Accounts Receivable (AR) and Accounts Payable (AP) refer to two key accounts, which must be included in your accounting practices. However, how do you differentiate between these similar-sounding terms?

Accounts Receivable and Accounts Payable refer to temporary accounts kept by companies to manage and record their unpaid transactions for their accounting purposes. They are maintained keeping in mind the financial policies, practices, industry standards and guidelines. Both these accounts are interlinked and cannot be separated from each other. They refer to the two sides of a transaction. They are used to record the incoming and outgoing cash flow to ensure that there is an accurate record of the financial transactions and the assets and liabilities of a company

A quick look at what distinguishes these two terms:

Accounts Payable Accounts Receivable
This account is maintained
for recording the amount of money that the
company owes to a creditor or supplier for goods or services purchased.
It includes both short-term and long-term debt commitments.
Includes notes payable and bonds payable.
This account is used to record the total amount of money owed by others such as buyers to the company.
It is a short-term account with the money needing to be received by the within a short time span.
A/P or Accounts Payable (AP) A/R or Accounts Receivable (AR)
This is accounted as liabilities in the balance sheet. The liabilities include current as well as long-term liabilities. This is accounted as an asset in the balance sheet because it is a payment promised to the company.
Reduces the company’s net cash Increases the company’s cash flow
A lower Accounts Payable (AP) bodes better for the business. A higher Accounts Receivable (AR) shows good signs of financial health.
The Accounts Payable(AP) of one company could be the A/R of the other. The Accounts Receivable (AR) of one company could be the A/P of the other.
This refers to the company’s debt that has to be paid off by a specific time in order to avoid default. This refers to the dues that a company has to receive because of products sold or services rendered.
The procedure for recording accounts payable is simpler. The procedure for recording accounts receivable is more complex.
These accounts are created on the basis of a set of terms and are operational within a set time period called the collection period during the payments have to be made or received. The duration of this collection period can affect the ability to cover their debts. A too short collection period for A/P can result in difficulty in paying off debts. A rather-too long receivable period can lead to difficulties in collecting back cash.

Accounts Payable and Accounts Receivable are necessary for the proper management of the company’s finances. Ensuring that Accounts Receivable (AR) collections are made on time, is critical for the profitability of a company, if the company functions on providing credit to its customers. A balanced Accounts Payable (AP)/Accounts Receivable (AR) indicates a strong financial position.Taking the help of an efficient Accounts Receivable (AR) and Accounts Payable (AP) service provider would enable organizations to manage their cash flow efficiently.

Also Read Related  Articles:

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1 6 Ways To Conquer Major Accounts Receivable Challenges
2 How to Leverage Accounts Payable to Improve Working Capital
3 Benefits of Procure to Pay (P2P) / Accounts Payable Outsourcing

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