Understanding Accounts Receivable and Accounts Payable for New Businesses

Both accounts receivable and accounts payable are vital for new businesses to manage cash flow and understand their operations. And though they share similarities, there are key differences between accounts payable vs accounts receivable which influence how business owners treat payments and invoices.

Staying on top of your accounts payables and accounts receivables are vital to the health of your business. Accounts payable and accounts receivable go beyond just tracking cash coming into and out of your business. They help you prevent unexpected expenses and identify pain points within your organization before they become huge problems.

In this article, we’re going to define the differences between accounts payable vs accounts receivable. We’ll also touch on their role in business operations that new business owners need to be aware of. Then, we’ll cover customer FAQs on accounts payable reconciliation, accounts receivables, answer “is accounts receivable an asset?”, and more.

Defining the Terms: Accounts Payable vs Accounts Receivable

For new business owners entering the world of finances within business operations, the terms “accounts payables” and “accounts receivables” may feel like more unknowns on a lengthy list of “I’ll get to it later.” However, mastering accounts payable vs accounts receivable, especially around tax season and during reconciliation of accounts, immediately propels business leaders forward along their business growth plans. Knowing these two key financial terms allows owners to both budget smarter and pivot faster.

Accounts Payables

First up, let’s cover accounts payables. Accounts payables are typically recorded upon getting the receipt of an invoice. This is based on the payment terms that both parties agreed to when initiating the transaction. When a finance team receives a valid bill for goods and services, it is recorded as a journal entry and posted to the general ledger as an expense. The balance sheet shows the total amount of accounts payable, but keep in mind it doesn’t get as detailed as individual transactions.

A company’s accounts payables consist of the amounts it owes to suppliers and other creditors, like items or services purchased and invoiced for. Accounts payable does not include payroll or long-term debt like a mortgage, though it does include payments to long-term debt.

Accounts Receivables

Next, accounts receivables are the funds that customers owe your company for products or services that have been invoiced. The total value of all accounts receivable is listed on the balance sheet as current assets and includes invoices that clients owe for items or work performed for them on agreed-upon credit.

In general, businesses will bill their customers after providing services or products according to terms mutually agreed upon when a contract is signed. Many organizations bill some portion of their fees up front. Also, for large orders, a company may ask for a deposit up front, especially if the product is made to order.

Once a company delivers goods or services to the client, the finance team invoices the customer and records the invoiced amount as an account receivable.

Accounts Payable vs Accounts Receivable: The Key Differences

1. For every sale or purchase, your business will either issue or receive an invoice. If you’ve provided the good or service, the finance team will note the amount you expect to be paid in accounts receivable. If you are paying the invoice, you’ll note the amount in accounts payable.
2. Accounts receivable is considered an asset because you’re counting on receiving that money within the timeline defined when the sale was initiated. Accounts payable is considered a liability because you will need to pay out that amount within a certain timeline.
3. In terms of accounts payable and accounts receivable, the financial team needs to ensure that the person responsible for paying bills cannot also enter invoices. Accounts receivables and accounts payables need to remain separate to prevent instances of fraud.

Frequently Asked Questions on Accounts Payable vs Accounts Receivable

So, you now know the difference between accounts payable vs accounts receivable and are ready to begin your financial operations journey on the right foot. Before you get started, however, be sure to grab answers to the following frequently asked questions regarding accounts receivables and payables.

How Frequently Should I Perform an Accounts Payable Reconciliation?

While accounts payable reconciliation can be time-consuming when you first start, reconciling your accounts makes tax season and end-of-year reconciliation of accounts that much easier. As a general rule, you should perform an accounts payable reconciliation once a month.

Is Accounts Receivable an Asset?

Accounts receivable is considered an asset. You’re counting on receiving that money within the timeline defined when the sale was initiated. On the other hand, accounts payable is considered a liability because you will need to pay out that amount within a certain timeline.

How Do I Perform a Reconciliation of Accounts?

To perform a reconciliation accounts, which includes an accounts payable reconciliation and an accounts receivable reconciliation, you should take the following steps:

1. Obtain all your bank records, including transactions
2. Obtain your financial statements, including records of income and expenses
3. Run through bank deposits and ensure everything was entered accurately in your books
4. Do the same check for accuracy on bank withdrawals and vendor payments
5. Ensure all reported expenses are accurate and up to date
6. Make sure your ending business bank balance matches the total in your business accounts.

Once you’ve ensured all your records and statements are accurate, you’ll use this end balance as the starting point for your next reconciliation of accounts.

Have More Questions? Reach Out to 4Corner Business Services in Denver, CO

We understand that there are a lot of components that go into starting a business in the Denver, CO area. That’s why 4Corner Business Service’s team of experienced accounting and small business consulting experts provide you with the tools you need to get your business running smoothly so you can focus your attention on other tasks. We are the masters of accounts receivable and accounts payable, taking the guesswork out of financial management for our clients.

Allow us to be the experts on bookkeeping and accounting for your Denver, CO company. In addition to reconciliation of accounts and payroll services for small and large businesses, 4Corner offers support in choosing and using accounting software, professional tax services, and valuable financial advice to guide decision making. We help businesses both large and small implement proven growth strategies so you can turn our small business consulting services into revenue successes.

We’ll take the guesswork out of accounting and business strategy so you can tackle more projects. If you have any additional questions, feel free to contact us at 4Corner Business Services. You can set up a meeting with Phil Zavala, founder of 4Corner, to get you on the right track.