Finance is the lifeblood of every organisation!! I am sure you would agree with the statement too. Finance or money keeps the business going. A business enterprise has to invest huge amount of funds to buy capital assets and to maintain its day to day operations. To undertake the business activities on a daily basis smoothly a business should have good amount of Working capital. The success of an organsiation is highly dependent on the effective management of operational cash which comes in the form of Accounts Payable (A/P) and Accounts Receivable (A/R).
For a small business, management of these receivables and payables is one of the important factors to maintain the income and liquidity position of the company. It is also a key element which influences in maintaining reputation of a company in the market.
It is a known fact that the accounting records are prepared from the business point of view and not the person who owns it. The purchase for one organisation is the sale for another. A single transaction is recorded differently in the accounting records of two different companies.
The term accounts receivable is used for the amount that is receivable by the business from others. Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer. Accounts Receivable also refers to an account containing all amounts owing to the business. It is all the amounts the business expects to receive. In other words, our debtors. Accounts receivable is an asset to the business.
On the other hand accounts payable is used for the amount payable by the firm to the outsiders. Accounts Payable are amounts a company owes because it purchased goods or services on credit from a supplier or vendor. In other words, Accounts Payable is an account containing all amounts that we owe to others. It is all the amounts we expect to pay in the future. In other words, our creditors. Accounts payable are liability to the business.
The amounts of accounts receivable and payable are usually compared as part of a liquidity analysis, to see if there are enough funds coming in from receivables to pay for the outstanding payables. This comparison is mainly carried out with the help of Current Ratio and Quick Ratio.It is important to collection the assets in a timely manner and maintain a balanced settlement of liabilities in order to ensure a healthy and positive net working capital for the company.