Josh Aharonoff, CPA on LinkedIn: Accounts Payable vs Accounts Receivable 2 BIG areas of Finance &… | 53 comments (2024)

Accounts Payable vs Accounts Receivable2 BIG areas of Finance & Accounting…and many organizations have entire departments dedicated to these 2 functions.They are the yin and yang of the money you OWE and the money you’re OWEDEach have their own quirks, and ways to analyzeLet’s get into it➡️ What do they mean?Accounts Payable → Money you owe to suppliers for goods or services purchasedAccounts Receivable → Money customers owe you for sales generated but not yet paid➡️ Where do they show up on your financial statements?They are both part of your working capital, and appear on your balance sheetAccounts Payable → Current LiabilitiesAccounts Receivable → Current AssetsThe movements in these accounts get shown on your statement of cash flows in your Cash from Operating Activities➡️ What are the journal entries?Accounts payable → Goes up with a credit, and down with a debitAccounts receivable → Goes up with a debit, down with a credit➡️ Why are they important?These 2 accounts can cause wild swings in your cash flowsAccounts Payable → the more favorable your credit terms with suppliers, the stronger your cash positionAccounts Receivable → the quicker you collect your cash, the less bad debt, and the more favorable your cash position➡️ What are some formulas around these?1️⃣ Accounts Payable Formulas:Accounts Payable Turnover → this measures how many times a company pays off its accounts payable balance in a specific periodFormula = Purchases on credit / avg accounts PayableDays Payable Outstanding (DPO) → Represents the average number of days it takes a company to pay its suppliersFormula = Accounts Payable / Purchases on Credit * number of days2️⃣ Accounts Receivable Formulas:Accounts Receivable Turnover → this measures how many times a company can convert its accounts receivable balance into cash in a given periodFormula = Net Credit Sales / Avg AR balanceDays Sales Outstanding (DSO) → this measures how long it takes on average to collect again your receivablesFormula = Accounts Receivable / Net Credit Sales * Number of DaysBad Debt Expense ratio → This show you how much you can expect to have in bad debt for each dollar in ARFormula = Bad debt expense / Total Credit SalesThat’s my take on AP & ARGot anything to add?Let us know by joining in on the discussion in the comments below 👇

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Credit Control and Accounts Receivables management is a very critical function in the working capital management of a business. So is meeting your supplier obligations as they fall due important. Receivables management however requires more attention and priority in my views as it presents to the organisation the cheapest source of finance even for you to pay your suppliers. You have to collect first before your payment days, hence the Receivables payment period should be always shorter than the supplier days ratio. Failure to effectively manage Accounts Receivables will result into a company arranging for financing sources that attract interest charges to finance the working capital management. These sources may include bank overdrafts and term loans. It is crucial that the Receivables and Credit Control section of any company is given the necessary tools, resources and support of top management as it is a critical component of the working capital management and also offeres the company the cheapest sources of finance.#CreditControl&Receivables Management..

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Basic Principles

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Accounts Payable vs Accounts Receivable2 BIG areas of Finance & Accounting…and many organizations have entire departments dedicated to these 2 functions.They are the yin and yang of the money you OWE and the money you’re OWEDEach have their own quirks, and ways to analyzeLet’s get into it➡️ What do they mean?Accounts Payable → Money you owe to suppliers for goods or services purchasedAccounts Receivable → Money customers owe you for sales generated but not yet paid➡️ Where do they show up on your financial statements?They are both part of your working capital, and appear on your balance sheetAccounts Payable → Current LiabilitiesAccounts Receivable → Current AssetsThe movements in these accounts get shown on your statement of cash flows in your Cash from Operating Activities➡️ What are the journal entries?Accounts payable → Goes up with a credit, and down with a debitAccounts receivable → Goes up with a debit, down with a credit➡️ Why are they important?These 2 accounts can cause wild swings in your cash flowsAccounts Payable → the more favorable your credit terms with suppliers, the stronger your cash positionAccounts Receivable → the quicker you collect your cash, the less bad debt, and the more favorable your cash position➡️ What are some formulas around these?1️⃣ Accounts Payable Formulas:Accounts Payable Turnover → this measures how many times a company pays off its accounts payable balance in a specific periodFormula = Purchases on credit / avg accounts PayableDays Payable Outstanding (DPO) → Represents the average number of days it takes a company to pay its suppliersFormula = Accounts Payable / Purchases on Credit * number of days2️⃣ Accounts Receivable Formulas:Accounts Receivable Turnover →this measures how many times a company can convert its accounts receivable balance into cash in a given periodFormula = Net Credit Sales / Avg AR balanceDays Sales Outstanding (DSO) → this measures how long it takes on average to collect again your receivablesFormula = Accounts Receivable / Net Credit Sales * Number of DaysBad Debt Expense ratio → This show you how much you can expect to have in bad debt for each dollar in ARFormula = Bad debt expense / Total Credit Sales===That’s my take on AP & ARGot anything to add?Let us know by joining in on the discussion in the comments below

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Differentiate Between the AP and AC. Extremely Important in the Accounting.

And I say it is very interesting, these two important roles. 😊 They have a totally different function but work back-to-back, to ensure good audit trails for a business and an accurate financial projection. 📈 #AlignmentWithExpectedBenefits 📌 #AchievabilityOfa*greedAlternatives 📌

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AP vs AR You need one to help you with the other

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Fundamental financial lesson. One of the first things I look at in a financial review is Working Capital changes over the last 24 months. It predicts a lot about the strength of the business and stress level of management.

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Accounts Payable vs Accounts Receivable2 BIG areas of Finance & Accounting…and many organizations have entire departments dedicated to these 2 functions.They are the yin and yang of the money you OWE and the money you’re OWEDEach have their own quirks, and ways to analyzeLet’s get into it➡️ What do they mean?Accounts Payable → Money you owe to suppliers for goods or services purchasedAccounts Receivable → Money customers owe you for sales generated but not yet paid➡️ Where do they show up on your financial statements?They are both part of your working capital, and appear on your balance sheetAccounts Payable → Current LiabilitiesAccounts Receivable → Current AssetsThe movements in these accounts get shown on your statement of cash flows in your Cash from Operating Activities➡️ What are the journal entries?Accounts payable → Goes up with a credit, and down with a debitAccounts receivable → Goes up with a debit, down with a credit➡️ Why are they important?These 2 accounts can cause wild swings in your cash flowsAccounts Payable → the more favorable your credit terms with suppliers, the stronger your cash positionAccounts Receivable → the quicker you collect your cash, the less bad debt, and the more favorable your cash position➡️ What are some formulas around these?1️⃣ Accounts Payable Formulas:Accounts Payable Turnover → this measures how many times a company pays off its accounts payable balance in a specific periodFormula = Purchases on credit / avg accounts PayableDays Payable Outstanding (DPO) → Represents the average number of days it takes a company to pay its suppliersFormula = Accounts Payable / Purchases on Credit * number of days2️⃣ Accounts Receivable Formulas:Accounts Receivable Turnover → this measures how many times a company can convert its accounts receivable balance into cash in a given periodFormula = Net Credit Sales / Avg AR balanceDays Sales Outstanding (DSO) → this measures how long it takes on average to collect again your receivablesFormula = Accounts Receivable / Net Credit Sales * Number of DaysBad Debt Expense ratio → This show you how much you can expect to have in bad debt for each dollar in ARFormula = Bad debt expense / Total Credit SalesThat’s my take on AP & ARGot anything to add?

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Fundamental financial lesson. One of the first things I look at in a financial review is Working Capital changes over the last 24 months. It predicts a lot about the strength of the business and stress level of management.