Accounting is an important part of your business. It is a task you want to ensure is performed correctly. If needed, bringing an accounting specialist may be in order.
Whether you handle the tasks yourself or hire someone to do it, it’s important to understand accounts payable vs accounts receivable.
Each plays a different role in the operations of a business. They can both be handled by the same person, although it is not recommended for purposes of checks and balances. There are options such as accounting software and outsourcing to limit the risks.
Are you a business owner struggling to understand the difference between accounts payable and receivable? Keep reading to learn five key differences.
- Accounts Payable vs Accounts Receivable
In its simplest form, the differences between accounts payable and receivables are their primary functions.
Accounts payables tract the monies that are paid out from your business. While the accounts receivable process focuses on monies owed to the company.
- Entering Accounts Receivable
Entering accounts receivables includes your billing processes. This is where you create and send estimates and invoices to customers. Track payments and outstanding balances.
In some industries, payments are due upon receipt. In others, the business has net payment structures. This means the client can have 30, 60, or 90 days to submit payment.
Tracking accounts receivables is easier when you have efficient collection procedures. You can read more here.
- Entering Accounts Payable
The accounts payable process involves paying your creditors, vendors, suppliers, and employees. There are other payables but these are at the top of the list.
Your accounts payables are entered on the general ledger and considered a current liability. Your liabilities should not outweigh your receivables.
- Accounts Receivables for Collateral
Maintaining accurate receivables is important because if your business is in need of a temporary infusion of cash, you can borrow against your receivables.
Receivables are also a good way to show investors and lenders that your business is viable and turning a profit. The state of your receivables is a good indicator of your business return on investment.
If you are putting more into the business than you are profiting, you’ll need to look at your price points and see if you are undercharging your clients.
- Accounts Payables to Build Business Credit
Obtaining a small business loan is virtually impossible in the beginning stages of a business. Creditors rely on your personal credit during the application process.
Maintaining accurate records and paying creditors on time will go a long way in securing business credit cards and loans.
Your records also make it easy to complete profit/loss statements.
Accounts payable vs accounts receivable shows everything you need to know about your business’s financial health. It helps you to plan for the future and address immediate needs.
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