If you start a business you will know that businesses rarely operate on a basis where buyers make immediate payment and suppliers receive cash payment for goods or services. Some form of credit is always in existence and that creates an entire system of account payable and account receivable for accounting purposes. Let’s take a look at these two.
Businesses must pay for materials purchased and for services and these fall under the head accounts payable, excluding payrolls. Accounts payable in business accounting covers various heads and processes:
- Non-standard invoices: Businesses may buy or receive services from non-registered sellers or services who may not raise an invoice. In such cases accounts section of the business creates a payment request form for processing. Typical payments include utility bills, stipends, refunds and registration fees.
- Invoices: Registered suppliers raise a tax invoice that goes into the payment queue and invoice may be for goods or services.
- Recurring payments: Businesses may have service providers who need to paid on a recurring basis according to a fixed schedule.
- Wire transfers and others: For payments to be made that do not fall in the standard heads there may be another head to cover wire transfers, tax payments and interest payments.
There is a defined process for accounts payable and the invoice or requisition for payment goes through channels of approval before finally being authorized for payment. In any case, all accounts payable fall under the head of current liability.All such payables may be considered towards costing of a product or service that the business delivers, along with others such as salaries and incidental expenditures.
Unordered List with Disc Bullets
- A business may raise an invoice on a buyer and that invoice goes under the head of accounts receivable, with the account squared off when the buyer makes payment. Invoice may be for goods or services rendered.
- A business may offer credit period to its buyers for payment and the invoices go under the accounts receivable head and a daily or weekly or monthly report will show cash flow and liquidity of the business.
- Accounts receivable statement can also show how many incoming payments are due and the delays and be a basis to follow up for payments.
- Accounts receivable, may, over time, show doubtful accounts that may have to be written off.
Accounts receivable are classified as current assets of the company and may be the basis for taking overdraft or some other form of credit facility from financial institution. As such the business owner needs to be particular in maintaining healthy inward cash flow with regular follow up to ensure timely payment. One can carry out analysis to know how fast payments are coming in, how healthy the cash flow is and the turnover. If outstanding payments are not being received then the owner may think of legal action to recover dues.
What is accounts payable for one company may be accounts receivable for its vendor.