What you must Know About Accounts Receivable & Payable
16 March, 2023
To a business owner, it is crucial to have an adequate understanding of accounting. Only by examining your books of accounts, will you be able to gauge your business' performance. You will across two important terms in accounting: accounts payable and accounts receivable. These two terms play a crucial role in helping you determine your business' bottom line. Continue reading to understand the difference between accounts payable and accounts receivable.
What are accounts payable and accounts receivable?
Accounts payable refers to money a business owes to its suppliers/vendors. This sum is shown as a liability in a company's balance sheet. It refers to the amount owed when you arrange to procure goods or services with a promise to pay later. It is also commonly known as bills payable account.
On the other hand, accounts receivable refers to the amount a company is entitled to collect from its customers for goods or services sold in credit. In simple terms, it is the money owed by a customer to you as per contractual obligations. Accounts receivable are also commonly referred to as debtors or bills receivable.
What is the process of accounts receivable and payable?
The process for accounts payable is as follows:
Receiving the invoice: This step involves you marking the quantity of goods received from a vendor against the invoice details. You must also record the validity of the invoice.
Reviewing invoice details: Note and review the details of the invoice such as vendor, date, authorisation, etc. These details are used to match with the purchase order later.
Updating records: You must revise the ledger accounts based on the invoices received.
Timely payment: You must process all the invoice payments before the due date and create supporting documents. Deduct the TDS and make the payment.
Depositing TDS: Deposit the deducted TDS with the government on or before the due date.
The process for accounts receivable is as follows:
Establishing credit policies: Firstly, you must create policies that establish a protocol that must be followed by the person who collects payments. This step includes:
Setting up mechanisms to determine customers' credit worthiness.
Setting credit limits for categories of customers.
Establishing collection periods.
Deciding on late payment penalties.
Invoicing: Since invoices serve as primary proof of sales, you must design them in a way that all parties are clear about the transaction. The invoices should clearly state the credit terms, the value of the services or goods provided, payment due dates, and acceptable payment modes.
Accounts receivable vs payable: what is the difference?
The difference between accounts payable and receivable is as follows:
Parameters | Accounts Payable | Accounts Receivable |
Definition | It refers to the money your company owes to suppliers. | It refers to the money owed to your business. |
Status | It is a current liability. | It is a current asset. |
Balance sheet term | It is under the head ‘sundry creditors’. | It is under the head ‘sundry debtors’. |
Now that you know more about accounts payable and receivable, it will be easier for you to manage the accounting aspect of your business.
To ensure that your business accounts are accurate and up to date, you need to have a payment collection system. To that end, you can rely on SmartHub Vyapar, a one-stop business and banking solution provided by HDFC Bank. With SmartHub Vyapar, you can easily accept customer payments via various modes. You can also ensure that you pay your vendors and suppliers on time. You can also access various banking services and avail of loans easily by relying on SmartHub Vyapar.
You can set up SmartHub Vyapar almost instantly with your own HDFC Bank Current Account. Opt for SmartHub Vyapar today for smooth management of your operations.
To Download SmartHub Vyapar App By HDFC Bank, Click Here.
Read more about How To Pay Your Vendors by clicking right here
*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. HDFC Bank SmartHub Vyapar is available to only Individual & Sole Proprietorship entity and for select Current Account variants only. For other entity types, please connect with the nearest branch.
Video
