Decoding Accounts Payable and Accounts Receivable
This article is not for you, but for you to share!
When you are using accounting terms every day, it’s easy to forget that some people, such as clients, have no idea what we’re talking about.
It’s that glassy-eyed look that you notice when you start talking about what we consider common knowledge, only to realise the information we’re sharing is going in one ear and out the other.
Not only that, but in different industries, they may be referred to differently. It’s only when we’re using them in front of someone who doesn’t know any better we can just tell, they’re not getting it.
How many times have you been trying to explain something to a client only to realise that what you have just told them might as well have been in another language, because for them, it was?
This is no one’s fault, it’s just one of those things that we come across day to day when we work with people from other walks of life.
What is Accounts Payable?
Quite simply, Accounts Payable is a debt.
It’s the money your business has to pay for goods and services that another business has provided to you on credit.
Basically, Accounts Payable means that you need to “pay” someone for the stuff that you bought to do business.
It can be likened quite simply as Supplier Payments.
What is Accounts Receivable?
As Accounts Payable is to Suppliers, Accounts Receivable is to Customers.
Accounts Receivable is a credit.
Basically you have extended credit to a customer, and they owe you money that you will “receive”.
A lot of the time it can be referred to as Customer Accounts, as they will pay you back for the credit that you extended to them at the time of purchase.
But What About Retail?
Most of the time in a retail environment, customers will buy items within an instant, without the business (supplier) extending any credit to them as the purchase is finalised.
Regardless of how fast the transaction is that takes place, at the end of the day, when the financial information is entered into the accounting, all of the day’s sales (for ease of explanation), will be accounted for as Accounts Receivable.
Any invoices for the stock that has been received and paid for on that day will be accounted for as Accounts Payable.
Conclusion
The easiest way to think of Accounts Payable and Accounts Receivable is thus:
Accounts Payable = Money goes out!
Accounts Receivable = Money comes in!
Adam Schell | Accentis | a.schell@accentis.com.au
- The Who, What, When, Where and Why of a Small Business ERP System - 6 March 2019
- Decoding Accounts Payable and Accounts Receivable - 11 November 2018
- Why Does Accounting Software Make Life Harder? - 13 June 2018
