Updated: Aug 20
Money! Word itself has a lot of powers. We all know how this world runs for money. But in this long run, the one who wins is, who keep the track of their money well. Earning money is a great thing but keeping the track of it regularly is a achievement itself, knowing where do you owe money and how much people owe money to you is a hectic task. This, in the accounting language is called Accounts Payable and Accounts Receivable. It sounds a bit complex to a common man, but we all somehow have encountered a bit of it during our lives.
Basically, accounts payable is debt represented in ledger entries that your company has to clear, whereas accounts receivable is the total outstanding invoice amount that your customers owe to you.
How can we differentiate accounts payable and accounts receivable?
For a better understanding, we can see them as the end and the starting of the same book. Initially, a businessman buys stocks for his business, and usually, payment is done after some time, so till then,the amount which is owed by the businessman to the producer is written in Accounts Payable. Now, when the same stock is being sold to a customer, the customer also tends to hold the payment for a while so till then the amount which is owed to a businessman by costumer is written in Accounts Receivable.
Accounts Payable are written as a current liability on the balance sheet whereas Accounts Receivable are written as current assets on the balance sheet.
The main cause of this can be observed as Accounts payable are observed due to purchasing stocks on credit.
Whereas Accounts Receivable are observed due to selling goods on credit to the customers.
Under Accounts Payable, the liability lies on the businessman. But in Accounts Receivable, the liability lies on the customer.
Accounts Receivable are responsible for cash in-flow. Accounts Payable are responsible for cash out-flow.
Cash out-flow is when money has gone out of the business whereas cash in-flow is when money comes into the business
Payable have different category of accounts for entries i.e sales payable, income tax payable, interest payable, etc On the other hand, receivables have usually have one account entry i.e trade receivables.
Unlike Accounts payable, Accounts receivable have a different type of account denoted as a bad debt account. A bad debt account is for those customers who refuse to make the payment, eventually, the whole payment is then on the firm itself.
Running a business or holding the responsibility of the one is never comes easy. We need to focus on even the tiniest of things to get better results and the best feedback's from the clients. And keeping track of Accounts Payable and Accounts Receivable comes under the crucial thing to check on. This gives the total idea of liquidity in the business. Which can help in getting the exact idea of the funds a firm has for operational things.