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Accounts Payable vs Accounts Receivable: A Quick Guide

Explore the difference between accounts payable and accounts receivable and manage your company’s cash flow efficiently.

Whether you run a company that handles a number of transactions per day or a few thousands, your business can only operate smoothly through an efficient cash flow management system. Not only does this help your company map out your entire financial year and prepare for any unexpected expenses, but an adequate cash flow also ensures the possibility of growth. Given this fact, it’s important for companies to stay on top of their accounts receivables and payables.

What Is Accounts Payable?

Your business’ accounts payable are any outstanding balances that you owe to vendors or suppliers for goods or services received. Whether you are a manufacturing company that received a shipment of steel racks or a bakery planning to order your next batch of cake boxes, there are items in your inventory that are to be paid at an agreed time.  

Your business’ accounts payable is normally recorded once you receive an invoice based on the payment terms you and your supplier agreed upon. This should be recorded on your ledger as an expense, with the balance sheet showing the total amount of accounts payable. Once the expenses have been authorised, the payment is issued as per the terms of the contract. After paying it off within the agreed timetable, your accounting team can record this expense as paid.

Generally, payables are divided into short-term and long-term payables. Short-term payables are the ones that you normally pay within the year, needing to be recorded as a current liability. Whereas long-term payables or liabilities are debts that require more than 12 months to clear. Accounts payable can differ from other liabilities that your company has to pay (e.g. short-term loans, accruals, dividends, and bills of exchange). These can include:

  • Transportation and Logistics
  • Licensing and Subcontracts
  • Services
  • Materials
  • Energy and Fuel
  • Products and Equipment

If your business has an accounts payable team, they will be responsible for coding, approving, paying and reconciling vendor invoices. In general, they should improve the payment process and make sure that each bill is accurate and legitimate. An effectively managed accounts payable process can save you a lot of time and money, especially when armed with automation capabilities.

What Is Accounts Receivable?

Accounts Receivable are any unpaid balances that anyone may owe to your company. Receivable accounts serve as:

  • Revenue accounts: showing the business’s present and projected income, and as
  • Current asset accounts: showing money that is part of the company’s net working capital. A current asset can also mean that the account balance is due from the debtor in a year or less. 

If the receivable takes longer than a year to be converted into cash, then it is recorded as notes receivable on the balance sheet.

When a transaction of goods or services has been made, your team should create an invoice to automatically credit the sales account and debit the accounts receivable account. Normally, your accounts receivable team will offset the account to make allowance for doubtful or late payments. This will allow your team to estimate the total amount of receivables that will never be collected.

Aside from the usual selling of goods and services, accounts receivable can come in the form of long-term payments such as loans and deferred revenue such as yearly subscription fees.

One of the best practices for managing accounts receivable is to create an ageing report to ensure efficient debtor management and payment collection. Ideally, companies will provide goods and services to their customers in exchange for specific payment terms. If the due date has passed and the customer hasn’t paid, the invoice starts to age.

Organise this information based on when the invoice was due and the number of days it is overdue. This way, your company can make accurate cash flow predictions and avoid increasing payment terms for customers with poor payment histories.

Challenges Of Accounts Payable And Accounts Receivable

Despite streamlining accounts payable and receivable processes, there are still challenges that your team may encounter when keeping your records organised. Here are five common problems that plague businesses, especially those that use manual, paper-based accounts processes:

1. Misplaced Invoices

When suppliers send the invoice by mail, email or fax, more often than not, these physical invoices can go missing and may cause friction between suppliers or customers. This can also cause incorrect statements and financial information when these invoices aren’t paid at the right time. This inconsistent information can also  affect your customers who receive the wrong invoice for their service.

2. Lengthier Processes 

As businesses gain more customers and order more raw materials from suppliers, logging these invoices manually can become more tedious and error-prone. With the lengthy approval times and even slower payments, you can encounter more problems like incurring late fees and delayed shipment of goods.

3.  Scaling The Business

Rapidly expanding companies also lack resources to support their growth and don’t have enough bandwidth to process more invoices and make/clear payments manually.

4. Physical Storage

In today’s digital age, it can be harder for older businesses to transfer their paper invoices to an online server. However, keeping relevant documents in filing cabinets can lead to higher storage costs and unnecessary difficulty when tracking invoices.

5. Duplicate Documents

Aside from losing invoices in filing cabinets, it can be easy to duplicate them when your team has little visibility on payment status, invoice amounts and supplier information.

Importance Of Automated Accounts Systems

Automated accounts systems play a crucial role in streamlining and optimising accounts payable and accounts receivable processes. Here are some key reasons highlighting the importance of automation in accounts payable and receivable:

1. Reduce Delays 

At the end of the month, AP and AR teams will have stacks of invoices on their desks with a large number of data. Instead of manually entering these supplier invoices, you can use an automated system that will automatically sort the data, whether they’re new or old customers. 

2. Improve Data Accuracy

Manual processes are prone to human errors, such as data entry mistakes, duplication, or calculation errors. Automated systems ensure greater accuracy and data integrity by leveraging standardised workflows, built-in validations, and automatic data capture. This will minimise the risk of errors and discrepancies.

3. Remain Compliant

Automated systems facilitate adherence to compliance requirements and internal control policies. These tools enforce approval workflows and provide automated reminders for regulatory obligations, such as tax filings or payment terms. Automation helps mitigate the risk of non-compliance, ensures consistency, and enhances financial governance.

Overall, automated accounts systems streamline operations, improve efficiency, enhance accuracy, provide real-time visibility, strengthen compliance, and foster better relationships with vendors and customers. Investing in automation for accounts payable and receivable processes yields numerous benefits that positively impact the financial health and operational effectiveness of businesses.

Book a demo with us to see how an expense management platform can lessen challenges in accounts payable and receivable.

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