AP & AR: The Difference Between Accounts Payable and Accounts Receivable

An important part of running a business is maintaining good financial records.

This includes keeping track of both accounts payable and accounts receivable.

But what, exactly, are these?

Accounts payable are what a company owes to others, such as vendors for supplies or creditors for loans.

Accounts receivable, on the other hand, represent money that others owe the company, such as customers for products or services sold.

In other words, accounts payable are the bills that a company owes to other companies, while accounts receivable are the amounts that a company is owed by other companies.

The main difference between these two types of accounts is how they are recorded in the accounting books.

Accounts payable are recorded as liabilities, while accounts receivable are recorded as assets on the balance sheet.

Accounts payable (AP) and accounts receivable (AR) are two important aspects of a company's financial health.

AP is the money a company owes its suppliers for goods and services, while AR is the money a company has coming in from customers.

In order to have a healthy financial state, a company must keep its AP and AR in balance.

If there is more cash going out than coming in, then this will cause problems with future operations.

What is Accounts Payable (AP)?

Accounts payable is an amount that represents the total value of all outstanding invoices or bills that you owe your business partners, vendors, contractors, etc.

The payment terms on these invoices can be either net 30 days or 60 days after invoice date.

This means that if you owe $100 to a vendor by April 1st but haven't paid yet, it's considered as "outstanding" until May 15th.

You would pay them at any time before May 15th.

In general, most businesses have some form of accounts payable; however, they may vary based on industry type, size, location, etc.

What is Accounts Receivable (AR)?

Accounts receivable (AR) is the money that a company owes to another company for products or services that have been delivered but not yet paid for.

Accounts payable (AP) is the money that a company owes to its suppliers for products or services that have been delivered and already paid for.

In order to keep track of how much money a company owes to others, both AR and AP are tracked as part of the company's balance sheet.

The main purpose of AR is to track how much money a company is owed by its customers and to ensure that these customers eventually pay up.

For example, if you sell widgets online through your website, then it's important to keep track of who has bought those widgets so that you can bill them later when they are due.

You may also want to set aside some money in case someone doesn't pay their invoice on time.

This type of tracking is called accounts receivable.

The Difference Between AP and AR

Accounts payable (AP) and accounts receivable (AR) are important aspects of any business. AP is the money that a company owes to its suppliers, while AR is the money that a company is owed by its customers.

Understanding the difference between AP and AR is critical for businesses because it impacts how they manage their cash flow.

Why Cash Flow is Important To Your Business

Small businesses tend to focus on the bottom line: profit.

While it is important to make money, it is also important to understand the different aspects of your business' financial health.

Two such aspects are accounts payable and accounts receivable.

If you have an understanding of these two numbers, then you will be able to better manage your finances as well as plan ahead for future growth.

This means that when a new customer comes in or there's some unexpected increase in expenses, you'll know what needs to happen next so you can stay afloat financially until things get back to normal again.

How AP and AR are Used

AP is used when you buy supplies from a vendor on credit with the intention of paying for the supplies at a later date.

Normally, the terms for such a scenario would be net 30, net 60, or even net 90.

This means that you would have either 30, 60, or 90 days to pay down your credit with your supplier in full or in part depending on the terms of the arrangement you have with that supplier.

AR is the opposite. Accounts receivable, as mentioned earlier, have to do with money that is owed to your business.

So if you sell a customer goods on credit, they now owe you money at a later date which you must collect in order to keep your business running.

It is also important to check the credit worthiness of any customer that you decide is allowed to purchase from your business as it is always possible that you don't ever get that money back.

If you allow a customer to purchase from your business on credit but they don't ever end up paying, it is recorded in the books a bad debt expense.

What is Bad Debt Expense?

Bad debt expense is an accounting term that refers to the amount of money a company sets aside to cover the potential losses from accounts that are unlikely to be paid.

This expense appears on a company's income statement and is used to reduce taxable income.

Generally, bad debt expense is determined by analyzing a company's accounts receivable and estimating the amount of money that will not be collected.

On average, companies write off around 1.5% of their receivables as bad debt.

Examples of AP and AR

Lets say you run a sporting goods store and work closely with a wholesaler of football cleats.

You are constantly needing to restock your supply of football cleats but the cleats you restock into your store aren't sold immediately as they hit the shelves.

Therefore there is a gap between when you would need to pay for the cleats and when you will actually see money flow into your business.

This is where opening an account with you vendor can be incredibly useful for your business as you won't be forced to use up cash that you don't have in order to constantly restock your store.

Rather, you are able to get the products you need and pay at a later date once the cleats have been sold.

Conversely, if you are a wholesaler of football cleats it is in your best interest to allow your customers to open accounts with your business as it will drive more revenue for your company.

Conclusion: What is AP and AR?

AP and AR are two different ways to represent a company's financial status.

AP is the "accounts payable" which is the total amount of money that the company owes to its suppliers.

AR is the "Accounts Receivable" which is the total amount of money that the company is owed by its customers.

Both of these figures are important to track, as they can give you an idea of how well the company is doing financially.

How Noon Can Help Your Business Thrive

Noon Bookkeeping is an outsourced bookkeeping and accounting solution for business owners consisting of a team of CPA's and certified, expert bookkeepers ready to help you organize the finances of your business.

Noon can handle all of your bookkeeping in one place so that you can focus on running and growing your unique business knowing that we’ve got your finances handled.

Learn more about how Noon can help you take control of your finances.

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