As a business owner, you may know how accounts payable, and accounts receivable are vital to growing your business, retaining customers, maintaining a healthy cash flow, securing potentially lucrative deals, and dramatically improving supplier collaboration. Maintaining a healthy balance between expenditures and revenue will open your world to lucrative opportunities, relationships, and positive financial well-being.
However, many still need to fully comprehend the intricate similarities and subtle differences that make them both integral drivers of healthy financial management. Such an understanding is crucial for proper accounts payable and accounts receivables decision-making to power through the competitive modern market.
This informative read will take you through the fundamentals of accounts payable and receivable, their similarities and differences, and provide a winning solution that could transform how you perceive them.
What is accounts payable?
For the sake of understanding, let’s assume you own a popular fast-food restaurant chain called EatOut and want to replace the old chairs you have in two of your many restaurant locations. The wholesaler FurnishNow, who you purchase the chairs from, may allow you to buy the chairs on credit rather than demand immediate payment in hopes that you will repeat business with them when you need to do the same procurement for your other branches.
Along with the delivery of your new chairs, FurnishNow also sends you an accompanying invoice with net-60 terms stipulating that you must make a full payment of $5000 to them within 60 days. These terms allow you to strategically pay for the sourced products in due time, ensuring your cash flow remains unaffected. Here, the money you owe FurnishNow for the products you received on credit is known as accounts payable (AP).
What is accounts receivable?
Now look at things from the perspective of FurnishNow. The chair wholesaler just sold you $5000 worth of chairs on credit under net-60 terms. Here, your company becomes their customer, and the sale becomes their accounts receivable (AR) as they have yet to collect payment on the product or service they provided to you. Setting terms such as net-30, net-60, and net-90 enables the wholesalers and other such vendors to receive consolidated payments of products they sell over a period rather than go through the hassle of collecting each payment individually.
Similarities between accounts payable and accounts receivable
Accounts payable and accounts receivable both involve recording transactions of money due or owed that can impact your financial statements and cash flow. However, that is not their only similarity, as there is more than meets the eye.
Here’s a breakdown of how accounts payable and accounts receivable are similar aspects of financial management:
- Both are crucial for a company’s finances.
- They greatly affect financial statements and cash flow.
- Both are properly recorded in the general ledger.
- They need coordination with external parties like vendors or customers.]
Differences between accounts payable and accounts receivable
Accounts payable and accounts receivable represent two sides of the same coin, which are equally important aspects of a company’s financial management and require extensive communication and coordination to be done right. But apart from that, when you look at it from accounts payable vs accounts receivable perspective, you will find that they have distinctive purposes and characteristics that affect your cash flow differently.
When you purchase your chairs from FurnishNow, you must pay for them within the agreed-upon terms. The purchase becomes a recorded liability on your company ledger when this happens. It signifies an increase in your overall accounts payables and should be considered a credit. However, for FurnishNow, it is an accounts receivable entry in the ledger that becomes an asset for FurnishNow as you owe them money. This is why it will be recognized as a debit increasing FurnishNow’s accounts receivables.
Even though it is a mutually beneficial transaction between two parties, there is a clear distinction between the creditor and the debtor between you and FurnishNow. This is the primary difference between accounts payables vs accounts receivable.
Here’s a side-by-side comparison of accounts payable vs accounts receivable for your understanding:
| Accounts Payable (AP) | Accounts Receivable (AR) |
| Accounts Payable is the sum of money you owe to a supplier or vendor for purchasing their services or products on credit | Accounts Receivables are the outstanding invoices your business has to collect from its customers for the money they owe you. |
| It is considered a liability for your company. | It is considered an asset for your company. |
| Your company is the debtor and must pay its AP obligations | Your company is the creditor and is owed money. |
| AP transactions are recorded under credits in the company’s books. | AP transactions are recorded under debits in the company’s books. |
| It must be managed appropriately to ensure you make timely payments to your suppliers. | It must be managed appropriately to ensure you receive timely customer payments. |
In conclusion, when facing an audit, your auditors may use varying methods to evaluate the effectiveness of your accounts payable and accounts receivable controls with a keen eye on errors, unethical practices, and payment delays from both ends. An excellent automated AP management system may help you avert any adverse outcomes, identify vendors and customers who can or cannot pay, and spot when financing is necessary to meet your obligations. So take your time and find the proper automated accounts payable software to address every unique pain point facing your business.
Streamline accounts payable with Zapro automation
Zapro automation can help you save time, cut costs, and keep your customers and vendors happy through its automated AP capabilities. It enables you to mitigate the challenges you face every step of the way, from purchase requests to invoicing to payments. Our automated AP management system will help your business thrive by eliminating 90% of manual accounting processes with virtually limitless customization for routing and approvals.
We recognize that your vendor payments can strongly impact profitability just as well as it does your revenue. Yet, many businesses continue to use inefficient manual processes to manage AP. Instead, consider our AP automation software to automate your invoice management, achieve better visibility into your AP spending, reduce tedious tasks, and improve your bottom line.
Our streamlined accounting platform is currently helping numerous customers keep track of invoices/bills, set reminders, make/receive payments, keep accounts up-to-date, and simplify the accounts payable and accounts receivable process. Partnering with us will ensure that all important aspects of your functioning can be managed without a hassle.
Zapro’s system will manage all your invoices and bills, ensure that you are always reminded to make your payments on time, and maintain up-to-date records. Additionally, our automatically generated financial reports will give you real-time clarity on all your business’s inbound and outbound cash flow. Contact us to find out more.