Accounts Receivable vs. Accounts Payable
Accounts receivable (A/R) and accounts payable (A/P) are accounting terms that are used to record incoming and outgoing cash flow in a company's general ledger. Accounts payable refers to money that a business owes, and accounts receivable refers to money that is owed to the company. Both accounts payable and receivables are recorded on the balance sheet, with A/R's recorded as assets and A/P's recorded as liabilities.
Accounts payable involves all the money a company owes to outside vendors for overhead expenses, such as rent, utilities, and supplies. These expenses are required to keep the company in business. A/P's are recorded as pending outflows of cash.
It is important a business stays on top of its accounts payable, as it is the only way to determine a business's financial health. In addition, a company must keep track of when its A/P's are due, as late payments can negatively affect a company's credit rating.
Accounts receivable involves all money coming into a company. This is money a company has earned, but has yet to be received. A/R's are recorded as pending inflows of cash. A/C's are good for a business, as it means the company is making sales and growing their business.
Accounts receivable often have different terms, with some receivables due in 30 days, and others due in 60 or even 90 days. This period of time is called the collection period. If the collection period for A/P is shorter than A/R, the company could have difficulty paying their debts. With A/R, the company is basically extending credit to its customers, and the terms are set forth in a contract.
Both A/P's and A/R's are temporary accounts that are listed on a company's balance sheet, and both can be considered a form of an IOU. With A/P, the company owes money, and with A/R, the company is owed money.
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