Account Payable & Account Receivable

Introduction

Accounting software is a solution for every business to manage financial details manually. GST billing software is specially created for accountants, retailers, manufacturers, businesses, etc.

Knowing about Account Payable (AP) and Account Receivable (AR) is needed for businesses that want a better accounting process.

The Account payable also refers to AP. Basically account payable is a process where businesses grant money to another party. This is a debt which a company or business has to pay to another company. The Account Receivable also refers to AR. Account receivable is a process where a customer or another party grants money to your business.

Both are equally important for account management. Through accounting software, you can easily manage the Account Payable and Account receivable.

What is an account payable?

Account payable is also known as AP. This amount is considered as small-time debts which are granted to another business. Business is responsible for paying this amount to the company at a specific time period.

A business’s total payable amount and time appear on its balance sheet. Payable amounts have to be paid in their given time period to avoid difficulties. AP is a very important part of the balance sheet.

AP is increased in the balance sheet that means a business or company buying material on credit, rather than paying an amount. The account payable is more responsible for paying bills and invoices. It is a burden of a business that will be reflected on the balance sheet. It is short-term credits that are extended by the vendors and creditors for goods, material, etc.

If a company purchases a product on credit then your credits will be increased on your balance sheet and while you pay this amount for the goods then the account payable will be debited on the balance sheet.

For example, there are two companies one is X and another Y. X company purchases material from Company Y, so this amount is credited on the X company’s balance sheet. When X company pays the amount for the good or material then the amount will be debited from the balance sheet.

What is account receivable?

Account Receivable is also known as AR. This is the amount of product that is delivered or used but not paid for by the customer or user.

Account receivable means the company made a sale on credit but it has to collect money from the buyer. Credit period amount is short ranging like few days, few months, or few years. This amount will be received by the business because it delivered material to the customer. Account Receivable is the total opposite of the Account Payable.

Receivable means an amount is not realized by the customers. Usually, a company sells its products, goods or services in cash as well as in credit.

This is an asset account on the balance sheet that represents the money due to a company in the short term.

For example, here are two companies A and B. Company B purchases goods or materials from company A on credit, after a month the company has the right to receive the amount of given goods to the customer.

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Difference between accounts payable & receivable

Once you understand the basics of Account Payable and Account Receivable, as well as you understand the difference between AR and AP.

It is a small business or leading business, AP and AR are both required for full transactions. In simple words Account Payable means you have to pay money to the client or company when the opposite side Account receivable means you have the right to get money from the customer who purchases your products or services on short or long time credits.

Let’s see the difference by the simple example which makes it easier to understand Account Payable & Account Receivable.

Company AB sells stock to Company XY on credit with payment terms of 30 days. Then Company AB records the amount with credit to sales and debits to account receivable.

Company XY records the purchase as a credit to the account payable. When the amount of the sale was transferred to Company AB, they debited the amount on the AP account.

At the time of sales balance sheet is like:

  • Company AB record a sale and a current asset on the balance sheet of Company AB
  • Company XY records purchase and liability on the balance sheet of Company XY

At the time Of payment balance sheet is like this:

  • Company AB record cash increase and an AR decrease on the balance sheet of Company AB
  • Company XY recorded a cash decrease and an AP decrease on the balance sheet of Company Xy.

Why is an account payable and receivable important?

Understanding Account Payable & Account Receivable is very difficult for a business but it is a very important concept. Most businesses work on credits so, they must be aware of AP and AR. Account payable and Account receivable is very important to your business.

1. Helpful for Investors:

AP and AR on your balance sheet then are effective for the financial. If any company’s AP account is maintained properly then investors easily gain trust in your business because you timely pay your debts. Companies have to maintain an AR account as well. If business AR accounts decrease and cash increases on the balance sheet then investors put trust in the company because cash flow is very important for every business.

2. Maintain the Cash Flow:

The account balance sheet of the company reflects the cash flow. When companies pay their debts then their cash will decrease and also debts will decrease or adapt. And the opposite side company gets the cash than in the balance sheet cash will increase and AR decreases.

3. The Financial condition of the company:

The financial condition of a company or business is known by its account. Account Payable and Account Receivable helps to know the financial position of the company.

If a company’s AP is decreasing and AR is increasing it means the company is financially stable in the market. If a company’s AP is increasing and AR is decreasing it means the company is financially unstable in the market. So, the company easily knows its market position through the AP and AR.

4. Records:

Businesses keep the records of their transaction of material, products or services and keep reports on AP and AR accounts of the company. This record helps the business about the amount, how much amount is payable and how much account is receivable.

Basically Account Payable and Account Receivable are very helpful to the business. Gross Accounting software provides useful software for handling accounts. Businesses or companies easily maintained the record of their financial transactions through accounting software. Gross Accounting software also provides various features to handle your payable and receivable transactions.

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Conclusion 

Companies use the Online account software for maintaining transactions or cash flow. Through accounting software, you can easily manage AP and AR accounts.

Account Payable and Account Receivable is an important part of the business. Both are opposite but both are required for your company. AP and AR reflect the cash flow of the business. Account payable and Account receivable in the company’s balance sheet helps the investor to gain trust to invest in the company.

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