It Is All About Business Symmetry
Any businessman knows that there are two sides to every transaction. In accounting that translates into business symmetry. One company has a sale that is known as a receivable. Another company has a purchase that is known as a payable. Accounts payable are amounts a company owes because it purchased goods or services on credit from a supplier or vendor Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer. Accounts payable are liabilities, while accounts receivable are assets.
Payables Typically Outnumber Receivables
Accounting records generally show the money owed to you in one account and money you have earned in another. Typically, you have more payables categories in your accounting records, including, for example, accounts payable, notes payable, wages payable, interest payable and bonds payable. Each payables category is used to show how much you owe to different types of recipients. Accounts payables, for instance, is the amount you owe to suppliers that you make purchases from on credit. Wages payable is the amount you currently owe to employees for their work. Let’s assume that Company A sells merchandise to Company B on credit. (Perhaps the invoice states that the amount is due in 30 days.) Company A will record a sale and will also record an account receivable. Company B will record the purchase (perhaps as inventory) and will also record an account payable. It is important to remember that high payables accounts can prohibit favorable terms on future loans.
Time Frame Important
As a general rule, receivables accounts are short-term. When buyers purchase “on account,” meaning they don’t have to pay at the time of purchase, they normally get invoices that offer a small discount for payment within 30 days, with late fees added after 60 to 90 days. Payables accounts include both short-term and long-term debt commitments for money you owe. Accounts payables are often the most significant short-term account. On the balance sheet, debts due within 12 months are called current liabilities. Long-term payables accounts, like notes payable and bonds payable, are amounts due after 12 months.
Cash Flow Correlation Noteworthy
Payables and receivables both correlate with your company’s cash flow. This is the amount of cash you have coming in versus the amount you pay out. The stronger your cash flow, the more stable your financial position. When you sell products on account, you limit your short-term cash flow by delaying collection of the earned revenue. When you buy products on account, you delay paying out cash, which allows you to use it to pay other bills or make new purchases.
Smart Revenue Earning Approach
When you earn revenue, you want to collect cash up front or minimize the time frame until payment. Offering a 2-percent discount for fast payment and making follow-up calls after 30 days may help motivate your receivables accounts to pay more quickly. When considering accounts payable, you have to compare the benefits of possible interest savings when paying up front against the preservation of cash by paying 60 or 90 days down the road.