Accounts Payable Vs Accounts Receivable

AP and AR are both important accounting terms used to manage a company’s finances.

AP stands for Accounts Payable, which refers to the amount of money that a company owes to its vendors, suppliers, or other creditors for goods and services that have been received but not yet paid for. Essentially, it’s the amount that a company owes to others.

AR stands for Accounts Receivable, which refers to the amount of money that a company is owed by its customers for goods and services that have been sold but not yet paid for. Essentially, it’s the amount that others owe to the company.

Accounts Payable (AP) is a term used in accounting to refer to the amount of money that a company owes to its vendors or suppliers for goods or services that have been purchased but not yet paid for. AP is considered a liability on the company’s balance sheet.

When a company purchases goods or services on credit, it creates an accounts payable entry in its books. This entry records the amount owed to the vendor, the invoice date, the due date, and other details. Once the company pays the vendor, it records a corresponding entry in its books to reduce the AP balance and reflect the payment.

Managing AP involves processing invoices, reconciling statements, and making payments to vendors in a timely manner. Companies often have AP departments or personnel responsible for these tasks. Efficient AP management is important for maintaining good relationships with vendors and for ensuring that the company’s financial records are accurate and up-to-date.

Accounts Receivable (AR) refers to the money that a company is owed by its customers for goods or services that have been delivered or rendered but not yet paid for. It is an asset on the balance sheet of a company, representing the amount of money that is expected to be received in the future from its customers.

When a company sells its products or services on credit, it creates an account for each customer to whom it extends credit. The account is then recorded as an account receivable, indicating the amount owed by the customer to the company. The company keeps track of these accounts, and once the customer pays, the company records the transaction as a reduction in the accounts receivable balance and an increase in cash or another payment method.

Accounts Receivable are important for a company’s cash flow management, as they represent a significant portion of its current assets. Efficient management of accounts receivable is necessary to ensure that a company has enough cash to cover its operational expenses and to invest in its growth.

In other words, Accounts Payable is the money that a company needs to pay, and Accounts Receivable is the money that a company expects to receive. Managing both AP and AR effectively are crucial for a company’s financial health and cash flow management.

The AP (Accounts Payable) and AR (Accounts Receivable) processes are important financial processes in any organization. Here is a high-level overview of the typical flow of each process:

Accounts Payable (AP) Process Flow:

Purchase Request: The process begins with a purchase request from a department within the organization.
Purchase Order: The purchase request is reviewed and approved by the procurement department, which then issues a purchase order to the vendor.
Invoice Receipt: Once the goods or services are received, the vendor issues an invoice to the organization.
Invoice Verification: The invoice is verified against the purchase order and goods receipt to ensure accuracy.
Approval: The invoice is then approved for payment by the appropriate department or individual within the organization.
Payment: Payment is then made to the vendor according to the payment terms outlined in the contract.
Recording: Finally, the payment is recorded in the organization’s accounting system.

Accounts Receivable (AR) Process Flow:

Sales Order: The process begins with a sales order from a customer.
Invoice Creation: An invoice is created based on the sales order and sent to the customer.
Invoice Delivery: The invoice is delivered to the customer through various channels such as email or mail.
Payment Receipt: The customer pays the invoice either through check, credit card or other payment options.
Payment Verification: The payment received is verified against the invoice.
Payment Recording: The payment is recorded in the organization’s accounting system.
Follow-up: If payment is not received, follow-up is done with the customer to collect the payment.

Note that these are high-level overviews, and the details of the AP and AR processes can vary depending on the organization and the industry.

For Accounts Payable Interview Questions please check out below:

Accounts Payable Interview Q & A Session – Rohitashva Singhvi

For Accounts Receivable Interview Questions please check out below:

Accounts Receivable Interview Q & A Session – Rohitashva Singhvi