It won’t be wrong to say that accounts receivable and accounts payable are like the yin and yang of businesses. When revenue and expenditures maintain a healthy equilibrium within an organization, business owners can seize growth opportunities and remain on a positive stance by handling their accounts payable and receivable.
However what are accounts receivable and payable, and why are they important in a company’s balance sheet? To help you know more, here’s a guide!
A Brief Overview
If a company has to manage a steady cash balance, it needs to balance its assets and liabilities along with stockholder equity in accounting. The basic accounting equation goes like this:
Assets= Liabilities +Stockholders’ Equity
What are Accounts Payable?
Your company’s accounts payable (AP) ledger enlists the short-term liabilities, or as we know it as obligations for items purchased from suppliers. For instance, any money owed to creditors, any third party ranging from banks and companies, or even an individual can be someone you borrow money from. In fact, one common example of accounts payable is the purchases your business makes for goods or services from other companies. Based on the terms of repayment, the amounts in accounts payable are typically due within a short period of time or immediately.
What are Accounts Receivable?
On the other hand, accounts receivable (AR), showcases the funds that a company expects to receive from customers and partners, which is why AR is listed as a current asset on the company’s balance sheet. One common example of accounts receivable is the money owed to you for goods sold or any services your company has provided to generate revenue.
How to Record Accounts Receivable?
To record accounts receivable, you can start by generating an invoice when a sale is made on credit, and make sure this invoice details the amount owed, the due date, and the terms of payment.
Next, create a journal entry where you debit Accounts Receivable and credit Sales Revenue, so you can reflect on the earned revenue and the obligation of the customer to pay. For example, if a customer owes $1,000, you would debit Accounts Receivable for $1,000 and credit Sales Revenue for $1,000.
When the payment is received, record another journal entry, this time debiting Cash and crediting Accounts Receivable. Using the same example, on receiving the $1,000, you would debit Cash for $1,000 and credit Accounts Receivable for $1,000.
However, when you manage your expense account or asset account to keep track of the overall budget, ensure to regularly review the accounts receivable balance to track outstanding invoices and follow up on overdue payments on your company balance sheet.
How to Record Accounts Payable?
For calculating the accounts payable, you can start by recording a bill from a supplier using a receipt and ensure it is entered into the accounts payable system. Just like you did for the accounts receivable turnover ratio, create a journal entry that debits the relevant expense or inventory account and credits Accounts Payable.
For instance, if you receive a $500 bill for supplies, you would debit Supplies Expense for $500 and credit Accounts Payable for $500. When the invoice is paid, record a journal entry debiting Accounts Payable and crediting Cash. In this case, upon payment of the $500, you would debit Accounts Payable for $500 and credit Cash for $500.
However, while you are managing your balance sheet and recording your accounts payable, keep track of the financial data to ensure timely payments and avoid any late fees.
The Challenges of Managing AP and AR
There’s no denying that accounts payable and accounts receivable are vital components of a company’s financial statements. If you are running a business and want to ensure liquidity and financial stability, handling AP and AR effectively is crucial. However, businesses often face several challenges in managing AP and AR. These include:
Cash Flow Management
Businesses often struggle with maintaining a balanced cash flow. While companies must ensure they have sufficient cash to meet their short-term obligations, they must also have enough liquidity for operational needs and investment opportunities in the long term.
Inconsistent cash inflow from accounts receivable turnover ratio, coupled with fixed payment schedules in AP, can create a mismatch and lead to potential cash shortages, or surpluses that are tough to manage.
Accuracy and Efficiency
Manually processing invoices and payments is prone to errors. It might lead to discrepancies and delays, and inaccuracies in data entry during the accounts payable process can lead to overlooked payments and disrupt the financial workflow, which might increase the workload, and affect the company’s credibility and relationships with vendors and customers.
Compliance and Risk Management
Businesses often struggle to ensure compliance with regulatory requirements because they need to adhere to tax laws, accounting standards, and industry regulations. Failure to comply can lead to penalties, legal issues, and reputational damage. In addition, fraudulent activities whether internal or external, can lead to significant financial losses that can undermine trust.
Vendor and Customer Relationships
Vendor invoices play a crucial part in the cash flow statement. Businesses need to balance payment terms to satisfy vendors while collecting the accounts receivable timely from customers. While late payments can strain relationships and lead to disrupted supplies, aggressively pursuing overdue payments from customers can damage customer relationships, while affecting future business.
Scalability Issues
When businesses grow, their AP and AR processes must scale accordingly. The challenge here in maintaining cash reserves is what works for a small business may not be effective for a larger organization with more complex financial transactions and a higher volume of invoices.
In such scenarios, adapting processes to accommodate growth without sacrificing efficiency and maintaining a steady income statement is quite a challenge for organizations.
Technology Integration
Getting a glance at the unpaid invoices, business transactions or outstanding payments on the general ledger is no cakewalk.
Whether it is about the credit entry, lodging the liability balance, or the debit entry in a general ledger, the accounting team struggles to enhance AP and AR processes while keeping track of the supplier invoices, total accounts, trade payables, invoice approvals, etc.
How do Our Services help?
When you opt for our accounting services, you can address the challenges associated with managing accounts payable workflow, and accounts receivable to enhance efficiency and effectiveness. Wondering how our accounting services can help? Here you go!
Automated Invoice Processing
When you reach out to us for accounting services, ensure to follow ethical accounting practices and provide automated solutions for invoice processing that can significantly reduce manual entry errors and accelerate the payment cycle.
With our services rendered, you can use Optical Character Recognition (OCR) technology. So, our system captures invoice data and all credit card payments in your cash account with high accuracy for faster approvals and payments. The automation in your revenue account doesn’t just minimize human error; it also streamlines the entire invoicing process, so payments are processed swiftly and accurately.
Enhanced Vendor Management
With our services, you can get vendor portals, where your vendors can submit invoices, track payment statutes, and resolve queries independently. With efficient operation, you can avoid bad debts, reduce the administrative burden on your staff, and allow your business to focus on more strategic tasks while being more transparent with clients for quicker resolution of queries.
Credit Management
Our AP team can compile your financial information, so you can focus on important vendor relationships, and with our services received, you can get thorough credit assessments and continuous monitoring of customer creditworthiness.
Especially for small businesses with volatile accounts, we streamline the credit entry process and provide detailed insights into the credit profiles of customers, so business owners can make informed decisions about extending credit and managing credit risks effectively.
How can this help? Well, maintaining a healthy credit line can help to minimize current liability and minimize the risk of bad debts while enhancing the stability of your account receivables.
Cash Application Automation
With our cash application solutions, your business can automatically match incoming payments with open invoices, hence reducing the manual effort involved and minimizing errors.
The automation can accelerate the cash application process, hence ensuring that your receivables are updated promptly and accurately.
Ironclad Accounting Services from the Professionals
Do you want to improve cash flow, save costs, and enhance the accuracy and efficiency of your accounts? Well, you can always reach out to us for accounting services.
With our efficient management of AP and AR, we can ensure a clear view of your cash flow and enable better financial planning and management.
With timely payments and collections, you can improve business liquidity, reduce the need for borrowing, and improve your company’s financial stability.
In addition, accounts automation can significantly reduce the need for manual processing, hence lowering administrative costs. You also get to reduce errors and ensure accuracy in invoicing, payments, and collections, so you can focus on strategic tasks instead of repetitive administrative work to improve overall productivity.
When your clients receive prompt payments and the communication channels are clear, you have better relations with vendors, and you have long-term business relationships.
Need more information about accounting services? Contact us right away!