Business owners should understand the difference between Accounts Receivable and Accounts Payable. While you may not be managing your books yourself, it’s still important to know what these concepts mean and how they work.
Generally, Accounts Receivable and Accounts Payable must be handled by different teams, or at least different people to prevent instances of fraud.
What are Accounts Receivables?
Accounts Receivable (AR) is the outstanding money your customers have to pay you for goods or services they have already purchased. In a balance sheet, this is classified as a current asset.
So, if your business has made a sale to a customer and issued them an invoice that must be paid by a specified date, this invoice is entered as an Accounts Receivable until the customer has completed the transaction.
For example, say you own a small printing company. A local law firm hires you to print 150 business cards for their employees. They agree to pay you within 30 days. You will record this amount as Accounts Receivable in your books until you receive the payment.
Accounts receivable offer the following benefits to businesses:
- They help predict future cashflow
- They make it easier to track unpaid invoices
- They can improve customer relationships
- They can increase your sales by letting customers pay later
- They give you a competitive edge
- They can help you get loans by acting as proof of expected income
You can always outsource accounting services in UAE and hire experts like the accountants at A&A Associate to manage all your accounting and bookkeeping needs.
What are Accounts Payable?
On the other hand, Accounts Payable (AP) is the money your business has to pay to lenders or suppliers for any goods or services you have purchased but not paid for. In a balance sheet, this is classified as a current liability.
So, if you purchased something from a supplier and received an invoice for it, that invoice will be recorded as a current liability until you have paid it. It is important to remember that Accounts Payable does not include mortgages or payroll.
Let’s use the same example as before in the context of Accounts Payable. Your small printing company buys paper and ink from a supplier. The supplier sends you a bill and allows you to pay within 30 days. Until you pay the money, the amount owed to the supplier is recorded in your books as Accounts Payable.
Accounts payable (AP) has the following benefits to business owners:
- They help manage and track what your business owes
- They reduce the risk of missed or late payments through better tracking
- They help maintain good relationships with suppliers by ensuring timely payments
- They help manage cash flow by letting you delay payments when needed
- They allow you to take advantage of delayed payment terms
- They can qualify you for early payment discounts
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Accounts Payable vs Accounts Receivable
Both Accounts Payable and Accounts Receivable play an important part in every business owner’s books. If your AP & AR are balanced, your cash flow will be steady and healthy.
Accounts Payable (AP) | Accounts Receivable (AR) |
What you owe creditors or supplier | What customers owe you |
Classified as current liability | Classified as current asset |
Decreases cash when you make payments | Increases cash when customers pay |
Helps with managing bills and payments | Helps with tracking incoming cash |
Usually short-term | Usually short-term |
Represented with a bill or invoice from supplier or creditor | Represented with an invoice to customer |
What Happens to Businesses Who Don’t Manage AP & AR?
If you don’t manage your Accounts Payable (AP) and Accounts Receivable (AR), your business can run into serious problems. For business owners in the UAE, it is very important to keep track of money you owe and money customers owe you.
Failing to do some could get you into trouble with the authorities and you may be penalized. Here are some problems you might run into if you don’t manage your Accounts Receivable and Accounts Payable properly:
- Suppliers may stop working with you if you don’t pay on time or charge you extra fees
- You might not have enough cash to pay your bills like rent, salaries, or electricity
- You may need to borrow money which can be expensive
- You could miss chances to grow your business or take on new customers
- Running your business becomes harder because you don’t know when money will come in or go out
For example, if you own a small printing company in Dubai and wait too long to pay your paper supplier you could lose their trust. At the same time, if you do not collect money from your customers quickly, you won’t have enough cash to pay your bills, putting your business at risk.
In the UAE, managing your AP and AR carefully helps your business stay healthy and grow. If you hire an accountant, you don’t have to worry about keeping good records and frequently checking your payments
