They are also important if you have investors or if you are considering borrowing money. In the world of accounting and balance sheets, AR is considered an asset, as they can be turned into cash in the future. AR:ĪR is important as they indicate that a business has successfully obtained orders and that it can expect an inflow of funds. This allows you to know how much money you have at your disposal, and how much money you will be paying for all your bills.
Regularly maintaining records ensures that you are up to date with who owes you money or who you owe money to, allowing you to be fully aware of your financial situation. Keeping track of your ARs and APs helps you understand the health of your business finance. In other words, AR refers to the outstanding invoices your business has or the money your customers owe you, while AP refers to the outstanding bills your business has or the money you owe to others. Accounts Payable is the sum of money you owe to a vendor or a seller for purchasing their product or service, for which you have not yet paid. This $10,000 is recorded as your accounts payable (AP). Now, let’s say you purchase $10,000 worth of material from a vendor, and the vendor gives you a certain amount of time to pay. Accounts receivable is therefore the sum of money your customer owes you for goods or services you delivered to them or that they used, which they have not yet paid for. This credit of $10,000 is recorded as your account receivable (AR). Let’s assume you’ve given your customer a certain amount of time to pay you $10,000 for a product or service that you’ve delivered to them. This allows customers some breathing space to pay you, and also removes transaction costs, and the hassle of collecting payments from customers every time. What is accounts receivable and accounts payable? (with examples)Īs a business, you will often have to allow your customer to purchase your product or service on credit, rather than collect payments immediately. If you don’t, fear not! This article will guide you through the basics of AR and AP, what they are, why they’re important, and some things you should keep in mind when recording transactions related to them. If you know a thing or two about running a business, chances are you already know what accounts receivables (AR) and accounts payables (AP) are.
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