Trade receivable, also known as accounts receivable, is an asset account on the balance sheet. It is mainly essential when a company allows a buyer to purchase their goods or services on credit. The phrase refers to the outstanding invoices of a company. It is similar to accounts payable, and we can quickly analyze a company’s strength with the account receivable turnover ratio.
Most importantly, receivables represent a line of credit extended by a company that usually has specific terms and conditions requiring payments due within a relatively short period. These are all current assets. If a company has receivables, it has made a sale on credit but has yet to collect the money from the buyer.
Nowadays, companies can quickly improve their day payables metrics with the help of accounting and finance software. One of the crucial advantages of using this software is that it can automatically send emails to the customers about due invoices and requests for immediate payment.
What Are The Benefits Of Account Receivable?
- Account receivable is a vital aspect of a business’s fundamental analysis.
- The concept is crucial when a company receives money from its suppliers or vendors.
- It is also a current asset that measures a company’s ability to cover short-term obligations without additional cash flow.
- Moreover, it measures the average collection period for a firm over a specific period.
Importance Of Account Payable:
A company’s account payables include payments it owes to suppliers, and it does not include any payroll or long-term debt like a mortgage. A company’s balance sheet shows the total amount of accounts payable without listing individual transactions. A skilled account payable team of a company is responsible for processing all the invoices and expense reports. Furthermore, they always maintain a good relationship with the suppliers and ensure all the vendor information is correct and up-to-date.
Differences Between Account Receivable and Account Payable:
- A business will either issue or receive a payment invoice for every sale or purchase. Here, we can consider AR an asset and AP a liability.
- In the case of accounts payable and accounts receivable, the finance department of a company needs to ensure that the person responsible for paying bills cannot issue invoices.
- Currently, most profitable firms choose to have one AR team member to prepare customer payment receipts and one team member from the AP side to approve invoices and pending charges.
- Auditors test account payables and typically use different methods to look for instances of quantity errors or find unethical behavior. At the same time, auditors look at the accounts to remove the due amount and charge it as an expense when testing the report receivable.
- Clients need to maintain the record of accounts payables; on the other hand, vendors need to keep a record of the accounts receivable.
To conclude the whole concept, we can say that accounts payable and accounts receivable are the two sides of the same coin. A finance and accounting solution helps us understand the financial strength of our business by saving time, improving control, and increasing productivity through automation.