Accounts Payable vs Receivable: How They Compare
Share this article:
What Is Accounts Payable?
How Accounts Payable Works
Calculating Accounts Payable
Pros and Cons of Accounts Payable
Keeps debts and future payments organized Helps companies stay on track of outgoing money, as well as when they should spend vs. hold Provides key financial information to potential investors or lenders Delaying payment can harm a company’s relationship with its vendors and creditors A growing accounts payable suggests a company may be having cash flow issues or a slowdown in sales Manual data entry can result in errors, leading to incorrect calculations, incorrect payments, and a rippling negative effects
What Is Accounts Receivable?
How Accounts Receivable Works
Calculating Accounts Receivable
Accounts receivable turnover ratio: This measures how efficiently and quickly a company converts its account receivables into cash within a given accounting period. The formula for calculating accounts receivable turnover for a one-year period is: Current ratio: Also known as working capital, the current ratio measures liquidity, meaning whether your company is able to pay its short-term obligations with available cash or other liquid assets. The formula is: Days sales outstanding: This shows how long, on average, it takes customers to pay your company for goods and services. The formula is:
Pros and Cons of Accounts Receivable
Extending credit can increase sales and large purchases Helps your company acquire new customers Makes your company more competitive with its peers Can be used to receive accounts receivable financing Diligent record-keeping is required May slow down cash flow Estimating value of uncollectible receivables can be difficult May have to work with collection agencies
Accounts Payable vs Accounts Receivable
Both represent the flow of money within a business Both are recorded in a company’s general ledger An overview of both is required to gain a full picture of a company’s financial health Both revolve around short-term financial transactions
Receivables are classified as a current asset, while payables are classified as a current liability A payable is money to be dispersed; a receivable is money to be received Receivables may be offset by an allowance for doubtful accounts, while payables have no such offset Payables are recognized as income unless written off; receivables are recognized as a liability until paid
How Are Accounts Payable and Receivable Related?
3 Small Business Loan Tips
Online lenders generally offer fast application reviews and quick access to cash. Conveniently, you can compare small business loans by filling out one application on Lantern by SoFi. If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit. SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.
Frequently Asked Questions
About the Author
Share this article: