What is Accounts Receivable and Payable? Common Errors Made by Businesses while Managing Them
Accounting is a land of confusion – there are so many interrelated and similar terms present that anyone can get confused. Out of all the accounting terminologies, people often get confused between accounts receivable and payable.
For an experienced accounts receivable outsourcing or accounts payable outsourcing professional, both the terms are polar apart. One is related to the asset accounts and other liability. Still, often amateurs get confused between both the accounts, which results in incorrect financial statements. It is very important to keep your asset and liability side straight to figure out the shareholders’ equity.
Thus, it is always advocated by CapActix accounts receivable and payable professionals to understand both terms carefully; otherwise, your accounting books will never show correct balance. If you are no accounting expert, accounts receivable outsourcing and accounts payable outsourcing services are just for you. But, to clear the basics, you can read the article.
What is Accounts Receivable?
Accounts receivable is a current asset account to keep a record of money owed to you. It is a payment due for the goods supplied or services rendered by you for which payment has not been received yet. The common example of AR can be bill issued by electric company to its clients after the electricity is consumed by the clients.
To record accounts receivable entry, you have to debit AR entry. For example, if you have sold $100 worth of office supplies to Mr. Sham on credit. In the journal entry, your accounts receivables will increase by $100, and office supplies accounts will reduce by $100. Sometimes, people get confused here and credit AR, which can completely ruin your financial statements. Thus, do hire professional accountants receivable outsourcing services for flawless accounting statements.
What is Accounts Payable?
Accounts payable is a current liability account to keep a record of money owed by you. You can owe money to your suppliers for the material that you have purchased on the credit. The common AP case study can be short term debts or obligations. When you purchase something on credit for the due course of your business, it will be considered as accounts payable. You have to precisely record each AP entry to avoid the occurrence of accounting errors, and for that, you can hire accounts payable outsourcing service provider.
When you often purchase items on credit, you have to manage accounts payable to record such purchases. Let’s take the previous illustration in AP context – if you have purchased $100 worth of office supplies from Mr. Sham, your liability account will increase by $100, and your office supplies expense account will increase by $100 – simple. But, only for professionals.
Common Accounts Receivable and Payable Errors
If your accounts receivable and payable has a single error, it will directly affect your asset and liability side, which will eventually impact your balance sheet. Thus, if you don’t want to waste your precious time – finding the account receivable and payable errors, you should avoid following common accounting errors –
1. Too Long Account Management
Now, if you have purchased or sold one item on credit in 2010, and you are still managing that account in 2020, it is a major threat to your cash flow. Moreover, the longer you carry forward accounts, the chances of errors will automatically increase because you are unnecessary, increasing the burden of your accounts receivable and payable management staff.
Ideally, one receivable and payable should not be longer than a month. As soon as a receivable or payable goes over 30 days, it should be immediately treated.
2. Not Adhering to Debit or Credit Laws
Your accounting staff needs to be fully aware of the local debit or credit laws, along with the federal laws. If your team isn’t familiar with the prevailing laws, your company might have to be prepared for a lawsuit.
The over debt collection or recovery is a very sensitive issue; thus, you should designate a person to make collection and recovery calls. Similarly, not paying invoices overdue can adversely affect the reputation or creditworthiness of the company in the market and making it difficult to procure the goods on credit. However, if you don’t have a significant budget or resources to hire dedicated staff, you can use accounts receivable outsourcing and accounts payable outsourcing services to get the flawless financial statements.
3. Generous or Lazy Behaviour
Whether you are a generous person who follows lenient credit policies or you are simply too lazy to compile debit policies, you can expect some errors in your accounts. You should keep business, and personal relations separate because it’s going to negatively impact the growth and stability of your company. Thus, you should prepare a proper collection and recovery policies to avoid any sort of errors.
4. General Accounting Errors
While recording receivable and payable entries, you can commit numerous common recording errors that can leave a drastic impact on your books. Some of the common accounting errors to avoid are –
When your accountant doesn’t record amount correctly, it is a case of subsidiary entry, which can be easily rectified with the bank reconciliation.
Error of Omission
If your accountant completely forgets to record accounts receivable and payable entry, it is an error of omission.
Your over busy accounting staff can jumble two-digit while recording the entry. For instance, if you have $2,100 due in accounts payable, but your accountant records $1,200, it is a trouble for you. Thus, if you hire accounts payable outsourcing services, you don’t have to worry about transposition errors.
Rounding up accounts can create a series of errors in your accounting books. For instance, if your one accountant record accounts receivable for $256.95, but another accountant record it for $256.96 or $256.94, it is going to create numerous errors in your books. But, when you hire a professional accounts receivable outsourcing company to handle AR, you won’t face such errors.
What to Do for Flawless Accounts Receivable and Payable?
Neither you want to hire new staff nor want to spend hours on maintaining accounts receivable and payable – right? Then, you just have to hire a competent and proficient accounting outsourcing company to manage your books. The outsourcing company has dedicated teams for receivable and payable management to ensure accuracy.
You can contact CapActix on email – [email protected] or can call on +201-778-0509 for the flawless accounts receivable outsourcing or accounts payable outsourcing services today!