Updated: May 7
What is Accounts Payable?
Accounts Payable (AP) represents the amount a company owes to a vendor or a seller for purchasing their product or service, which has not yet been paid. For example, you purchase $5,000 worth of material from a vendor and the vendor gives a certain time period to pay. $5,000 is recorded as AP and has to be paid within that period. Once the amount is paid, the AP account will be reduced by the same amount as the liability is cleared and you no longer have to pay.
On the balance sheet, accounts payable is a liability account. Liability is divided into short-term liability and long-term liability. Short-term liability is payable in less than a year while long-term liability is payable in more than one year. Accounts payable is a short-term liability.
What is Accounts Receivable?
Accounts Receivable (AR) is the amount owing to a company from selling goods or services but the company has not yet received payments. Let’s say you sell a customer a product worth $2,500 on credit. The $2,500 is recorded as AR, implying that you have successfully obtained the order and will receive the money in the future. Once the money is received, the cash account will increase by $2,500 and the AR count will be decreased by the same amount, as the customer has made the payment
In the modern economy and the implicit regulation of today's businesses, AR is expected to be receivable within one year. AR is therefore treated as a current asset on the balance sheet.
Why are AR and AP important?
AR and AP are important measures for businesses to balance revenues and expenditures. Managing AP is crucial to making sure the business does not have to deal with any issues caused by missed payments or overdue bills. Meanwhile, AR allows businesses to do calculations on average daily or monthly revenue as well as estimate the time to collect money. The company can base on AR and AP figures to calculate metrics that help businesses make the right decision and make sure the company is healthy and all the liabilities are payable.
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How do we manage AR and AP?
Handing AR and AP involves entering invoices for customers and bills from vendors and update all relevant accounts. In order to keep track of new orders and transactions, all the information related to vendors, customers, orders, and the amount should be inputted in a correct manner, a professional accounting tool is a way to go. It also allows bookkeepers to keep track of the status of payments, as well as managing supporting documents for the purpose of payment or auditing. At Irvine Bookkeeping, we manage all the processes involved with AR and AP using QuickBooks.
If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.
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