What you’ll learn:
- What are accounts payable and accounts receivable
- The difference between accounts payable and accounts receivable
- How accounts payable and accounts receivable affect your business
Accounts payable refers to debt a company owes its vendors, while accounts receivable is debt owed to the company by its customers. Payables and receivables are the two main components that determine your cash flow. Errors in how you record these amounts or keep track of what’s been paid and what hasn’t can jeopardize your business.
What are accounts payable?
In simple terms, accounts payable (AP) are the current liabilities on your balance sheet. This means that accounts payable are the debts your business owes that must be paid within one year. These debts typically represent goods or services that have been delivered but not yet paid for.
Accounts payable are different from long-term liabilities, such as loans, which can be paid over a longer period.
An example of accounts payable would be if your company ordered office supplies from a vendor with an agreement to pay 50% upfront and 50% in three months. The remaining 50% owed to the vendor would be recorded as accounts payable in your accounting ledger.
When you make payments is a strategic decision. Your business’s cash flow is directly impacted by fulfilling accounts payable. When payments become too high or frequent, the loss of working capital may interfere with day-to-day business operations.
What are accounts receivable?
Accounts receivable (AR) is an asset representing payments due to the company.
An accounts receivable transaction would occur when a customer purchases something on credit. For example, if a customer buys a $1,000 piece of furniture from your store and agrees to pay in three monthly installments, your store has $1,000 in accounts receivable.
The accounts receivable balance is important because it represents the cash that will be coming into the company soon. This cash can be used to pay off debts, such as accounts payable.
What’s the difference between AR & AP?
The main difference between accounts payable and accounts receivable is that accounts payable is money owed to vendors, while accounts receivable is money owed by customers.
Both accounts payable and accounts receivable are tied to cash flow. Large amounts of accounts payable might indicate that your business is overspending, while large amounts of accounts receivable can strain cash flow and may indicate that customers are taking too long to pay.
Accounts payable also affect cash flow because it represents a short-term liability that must be paid within one year. Accounts receivable do not have the same time restrictions, though you can apply payment terms to encourage on-time payment from customers.
Importance of accurate accounts payable & receivable
Maintaining accurate accounts payable and accounts receivable is important for two main reasons:
1. It helps you manage cash flow
2. It’s necessary for future forecasting
If your accounts payable and accounts receivable are inaccurate, it will throw off your entire cash flow analysis. This, in turn, makes it difficult to predict future cash flow levels and plan for growth or other business goals.
Additionally, lenders often look at accounts receivable when considering a loan or line of credit. If your accounts receivable is healthy, it may be seen as a positive sign that customers are frequently using your credit terms. However, if accounts receivable is too high, it could be a sign that customers are struggling to pay their invoices on time.
There are a few key things business owners can do to better manage accounts receivable and accounts payable:
1. Automate whenever possible: Automating AR/AP can help save time and ensure accuracy.
2. Streamline your invoicing process: Streamlining your invoicing process can help you get paid faster. Make sure invoices are clear and concise and include all the necessary information that the customer needs to make a payment.
3. Optimize payment terms and methods: Optimize your payment terms and methods to make it easy for customers to pay their invoices. Offer multiple payment methods and consider giving discounts for early payments.
Better AR/AP management with Hopscotch
Hopscotch makes it easy to manage your AR/AP accounts. Instead of manually reconciling invoices, you can integrate with Quickbooks and simplify your payment process. Hopscotch automatically syncs all your activity to Quickbooks, reconciling payments to invoices and bills.