The Difference Between Accounts Payable and Accounts Receivable

Cash flow is one of the biggest concerns and success factors for startups and small businesses. It’s what occupies most business owners’ minds: the inflow and outflow of money in the business bank account.

One of the best indicators of cash flow is Accounts Payable (AP) and Accounts Receivable (AR). With a solid understanding of these terms and regular tracking, you’ll have a good idea of where you stand with cash flow.

What is Accounts Payable or AP

The term Accounts Payable, put simple, means “what you owe”. This is any and all outstanding and unpaid bills and invoices for products and services you’ve procured. This does not include payroll.

Once a bill or invoice is paid, or a credit card purchase is paid off, those amounts leave Accounts Payable. So while your bank account may give you a certain balance, if you take into consideration your Accounts Payable, your balance is actually lower. Accounts Payable is debts that you owe but have not paid yet.

What is Accounts Receivable or AR

Accounts Receivable is a term referring to payments that are owed to you for services or products that you sold. This is important especially for service providers who often deliver a service and then send an invoice, with payment being due at an agreed upon time.

Once an invoice is payed by your customer or client, that amount leaves Accounts Receivable. So in this case your bank account balance would go up if and when all your Accounts Receivable items are paid.

To sum it up: AP is I.O.U.’s and AR is U.O.Me’s

The Benefits of Tracking AP & AR

By using these separate accounts for money you owe and money that’s owed to you, you can have a more accurate picture of your current financial state. If for some reason all your debts are called in, you may have a cash flow problem and overdraw your account. So it’s good to know the balance of your accounts payable to make sure you can cover all your bills. And if you have a large amount in Accounts Receivable you may be able to make a purchase for your business even if your cash flow is low, because you know when the payments come in you will have plenty of money.

If you are audited, or if investors are looking at your business, the information tracked in AP / AR is extremely valuable.

How to Keep Track of Accounts Payable and Accounts Receivable

Make sure you are recording all the important information related to Accounts Payable and Accounts Receivable. For AP, that includes:

• Biller’s name
• Account number
• Invoice number
• Invoice date
• Expense type
• Payment due date
• Payment status

For AR, you will want the same information tracked as well as what type of account receivable it is. There are three types: Notes Receivable, Trades Receivable, and Bad Debt.

What is Notes Receivable? Most bills are due within two months. A Notes Receivable would be a special exception using a promissory note that legally protects you so you will be paid within a year.

What is Trades Receivable? The amount due as a direct result of a sale on credit.

What is Bad Debt? When a customer or client fails to make the payment they owe you. Unfortunately sometimes they cannot pay, so you will not receive the income. But there are tax provisions to help offset the loss.

Are Accounts Payable and Accounts Receivable over your head? You’re not alone. Work with a trusted accountant like one of our bookkeepers at Lin Company. We can take care of all your AP / AR needs so you can focus on what you enjoy most. Start a live chat with a real accountant now to discuss your needs or contact us to see if we are a good fit for your business.