Accounts Payable vs. Accounts Receivable: What You Need to Know

What are accounts payable?

Accounts payables are short-term debts owed to your suppliers and vendors, so they’re usually seen as liabilities. Here are some examples of accounts payable transactions:

• Purchase of goods or services from another company
• Loan from a bank or financial institution
• Purchase of raw materials
• Travel expenses
• Equipment
• Leasing
• Transportation

These are different ways to classify accounts payables, including the below: 

• Taxes
• Wages payable
• Loans payable
• Nontrade payables
• Trade payables 

All of these items – except wages payable – are processed through your accounts payable process. Wages payable is processed when your company runs payroll. 

It’s essential to comprehend and stay on top of your accounts payable. Knowing how much your company owes its vendors and suppliers will help you avoid late payments and additional fees. 

When recording an accounts payable transaction in your recordkeeping, you want to debit the expense from your account. For instance, if your business purchases $500 in office supplies from Staples, your general ledger should show the debit from your accounts payable. 

Here is an example of how that transaction would look:

What are accounts receivable?

Accounts receivable is money owed to your business by your customers. Since accounts receivable payments generate future cash flow for your company, it’s considered an asset. Successfully managing accounts receivable means becoming an efficient debt collector.

An example of accounts receivable is a phone company billing a customer for their monthly cell phone usage. While waiting for the customer to pay the bill, the accounting department would mark it as an unpaid invoice on their accounts receivable. Any goods sold or service rendered is considered to be accounts receivable. 

It’s your company’s responsibility to bill your patrons for any services rendered. Your invoice should include the product or service rendered, the payment amount, sales tax, and the due date. 

To record accounts receivable, you must first ensure the debit is receivable and then credit the revenue account. When the customer pays their invoice for the services rendered, your business will debit the cash amount and credit the accounts receivable account. 

If the invoice is for product sales, you’ll want to add an inventory reduction on your balance sheet. For example, if your company finalizes a sale of $30,000, and $15,000 was from the sale of products, here’s how you would record that information in your general ledger: 

Discounts on accounts payable and receivable

There are many advantages to paying an account before it’s past due. Some vendors may be willing to offer you a discount for paying your invoice within 10 to 14 days of the initial due date. 

If a vendor offers an early payment discount, your business can save money by paying early, while the vendor benefits by receiving the payment ahead of time and having additional access to cash flow. While a minor discount may not seem like a big deal, it can significantly improve the profits of your company. Even receiving a 2 percent discount can improve yields in the long term. If you receive an early payment discount, you should note the discount in your ledger to avoid any future discrepancies. 

Conversely, as part of accounts receivable, you can offer a discount to customers who pay their invoices early. Some businesses also opt to give their clients a loyalty discount as a thank-you for their continued patronage. But again, recording these transactions properly is vital. For example, let’s say your business offers a 10 percent discount if the invoice is paid at least a week early. In this case, the ledger entry would read as follows:

There are usually guidelines on how to track the discount being offered. For example, if you pay an invoice within 10 days for a 4 percent discount, the notation on the invoice should read “4/10.” Both numbers can change depending on the exact discount and the due date for receiving the discount.

Tracking accounts payable and receivable

To track accounts payable and receivable, hold on to every receipt, invoice and order. If even one invoice slips through the cracks, your financial records will be off balance. 

Tracking your financial accounts properly from the beginning will help your business succeed in the long run. Additionally, it will show your customers that you operate your business in a professional manner. 

You also must stay current on due dates for both customers and vendors. Managing the money you owe and the money owed to you will ensure you receive and make your payments on time. 

It’s also a good idea to keep an eye on any aging accounts. These are accounts that weren’t paid on time that can be overlooked. 

How accounting software can help track accounts payable and receivable

It’s beneficial to invest in feature-rich accounting software to help you manage both accounts payable and receivable. Here are a few advantages of using accounting software to track assets and liabilities:

• It reduces errors. Accounting software programs can reduce errors by removing the need for manual data entry.
• You can set up invoices. High-quality accounting software typically includes features that allow you to create professional invoices and track customer information.
• You can track vendor payments. Accounting software helps you manage vendor payments and ensure you don’t miss a due date.
• You can run reports. You can also use accounting software to run daily and monthly financial reports, like a profit and loss statement, balance sheet, or cash flow statement. These analyses are critical for financial management. [Learn more about accounts payable reporting.]

Accounting software can save you time by doing some of the more tedious work involved in accounts payable and accounts receivable for you. The ideal accounting software product will depend on the type of business you run, but most programs can be customized to fit your specific needs. 

Best accounting software for tracking accounts payable and accounts receivable

Top accounting software solutions make it easier to stay on top of accounts payable and accounts receivable. They let you automate invoicing and alert you when customers are late on their payments. You can even schedule automatic payment reminders. You can also use such software to generate aging reports for accounts payable and accounts receivable. 

Here are our picks for the best accounting software on the market if you’re looking for tools related to accounts payable and accounts receivable:

• QuickBooks: QuickBooks is one of the most popular accounting software options and comes with invoicing, expense tracking and reporting features. Learn more in our QuickBooks Online review.
• FreshBooks: FreshBooks offers detailed invoicing features, including recurring invoices and automatic bill pay reminders. The software will also let you know when a customer has viewed the invoice. Our FreshBooks review breaks down the essential tools.
• Xero: Xero makes it easy to send invoices, reconcile your transactions and generate financial reports. You can also use the software to manage vendor relationships. Find out about the most helpful features in our Xero review.
• Plooto: Plooto has much to offer businesses when it comes to accounts receivable and accounts payable, including the ability to automate the accounts payable process. Get all the details in our full Plooto review.

Proper accounting minimizes errors

Managing accounts payable and accounts receivable is necessary to ensure you’re accurately tracking your cash flow and spending. Furthermore, understanding the difference between them is important so you don’t accidentally mix up the two in your general ledger and create inaccurate financial records. 

When your business correctly tracks its accounts payable and receivable, there is a higher likelihood you won’t run into any errors. This accuracy is vital if you don’t have a large accounting department managing your firm’s financial information. Fortunately, the right accounting software can save you valuable time and money and help prevent errors that could hurt your bottom line in the long run.