There are a lot of different terms in the accounting profession that are very unique. You would not find this type of language outside of business and accounting, which means it can become very confusing for someone who may not be as familiar to it. Most business technology currently uses these very niche terms to label what their products can do and what features they hold. Two common areas are accounts payable and accounts receivable. They sound very similar but have two very different functions.
Accounts Payable v. Accounts Receivable
Most companies, when buying multiple items for stock or buying in bulk, will make a purchase on credit. This allows them to receive the item and get invoiced for, giving them some time (usually around 30 days) to make payment. The company will then receive an invoice that they will need to make payment on. This is what accounts payable is, all the invoices that a company owes money to and will pay.
The accounts payable team at a company has to pay attention to a lot of supporting documents and details on those documents to ensure that they are making payment to a legitimate account. Those documents can include purchase orders, receiving reports, invoices and contracts. For a company to remain in good financial standing, the accounts payable department must do well at their jobs. A company’s ability to receive credit in the future is dependent upon paying all open invoices on time.
One company’s accounts payable is another company’s accounts receivable. Accounts receivable is the money owed to company after extending credit and delivering a product or service. For example, Company A purchased 1,000 pens from Company B, totaling $3,000. Company B can now collect $3,000 from Company A as “accounts receivable”. In order for Company B to collect, Company A must pay them on their open invoice in 30 days.
A company’s accounts receivable is directly related to their cash flow. If their customers are not paying them on their open invoices, they will not have any money to work with. In most cases, if a company is struggling with cash flow it is usually because they are not collecting on their accounts receivable. The older an invoice goes without being paid on, the less likely it will be that the company will receive the full amount. In order to collect in full, there are a lot of accounts receivable software tools companies can use to assist them in their collection efforts.
Obviously, accounts payable v. accounts receivable are two very different concepts, however, they do intersect and work with each other. Both accounts payable and accounts receivable directly relate to the financials of a company and how much cash flow a company will have. In order to stay in good financial standing, accounts payable and accounts receivable must have attentive teams that do their job well.