The same transaction is marked differently in the balance sheet of both buyer and seller. An item bought by one organization is a sale for another. While one will add it against Accounts receivables (seller), another will ensure adding it to the section of accounts payable (buyer) as the cash will flow out of the company.
In a balance sheet, accounts payable are recorded as liabilities whereas receivables are the assets owned by the company.
Efficient management of records in any small business holds utmost importance as they ensure the maintenance of healthy cash flow into the business.
Both the accounts receivables and payables management records have their unique significance in the business world.
For beginners, here is a detailed description and crisp differentiation between accounts payable and accounts receivable management –
What does Account Receivable and Account Payable refer to?
Accounts Payable Management-
It’s a process of maintaining a record known as AP sub- ledger (balance sheet of the company) to keep track of money that is owed by a business to its suppliers. It is different from notes on payable liabilities, which are debts formally created by legal instrument documents. The amount is firstly recorded at the time when the order is been vouchered for the payment. The term vouchered refers that invoice is been approved by the company for manual payment. Other than the approval, the order needs to be recorded on the AP general ledger in the category of trade payables, for the purchase of goods or for availing the services.
Accounts Receivable Management –
Basically, it is a type of record that companies use to maintain in order to keep track of the money they owe to their clients whom they have been served in terms of invoices. AR Ledgers – is the term that is been used to refer those records in the business world. It is considered as a legal term that enforces any of the business organization for payment to the service provider or the vendor who have served. Accounts Receivables is the amount that a company use to claim from their clients for services they have provided or goods been supplied on order. AP record of one company is AR record for the other. For fairer deal, it’s important that a product which is been sold or purchased through invoice is enlisted on both.
Records on ledgers –
Accounts Payable Management –
- The purchase a business has made
- The amount of money payable for services and goods the company ordered, including other costs.
- The total amount payable in the end of the month with additional charges for debtors
Accounts Receivable Management –
- The sales a business has made through invoice
- The total amount of money that the company claims for goods or services, including other charges
- The variation of the amount owed at the end of the month for debtors
Payment terms –
The amount that one pays is received by the other as the cost of service, the company has offered. That is the reason the payment terms are same for both. The thing that differs is – the product recorded in AR ledger will lead to inflow of money and if it is in AP ledger then it will lead to outflow of money.
Other than that, the basic term that both Account payable and Account Receivables has to obey is “Net 30 days”. This term implies that the payment is due at the end of the month or 30 days, from the day the order is placed. After that, the debtor fee is applicable on the payable or receivable amount.
The payable company has no restriction for paying the debt amount before debt date. It’s up to receivable business organization whether they want that debt amount from the payable organization or are offering concession according to the terms they agreed at the time of invoice.
In case of early payment to receivable business organization, the payable company is sometimes offered with discounts. This is applicable in special cases when the service provider has declared in advance or just want to have a long-term relations with that business organization for mutual benefits.
Duration Analysis –
The service providers maintain a detailed debtor book, which is categorised as – 90 days, 60 days, 30 days, current or longer. As a client orders something, they use to analyse that client by categorising them according to payment terms. Same record is maintained by payable companies to categorise the service providers according to quality of services.
After the above detailed description and differentiation, here we conclude that account receivables and payable are two interrelated records and close monitoring of both is highly necessary. If as an organization, you’re keeping a close eye on cash flow it will make many other tasks run smoother. All the above mentioned differences clarify the need of better management for healthier business relations.
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