Accounts Receivable and Accounts Payable Accounting – Why Critical for Small Business?

The first question that might come to your mind is – What is an Accounts receivable and whether I need to take care of A/R accounting for my small business?

Accounts receivable (A/R) shows what others owe to the business enterprise at any point of time. Accounts receivable accounting comes into play generally when your business does sales on credit. When a cash sale is done, there is no receivable due from customers, hence no need to have A/R records. However, when a business has credit sales on its books, the amount due from customers are generally recorded as Accounts Receivable. In accrual method of accounting, the accountant or the bookkeeper need to ensure that all such receivables have been accounted accurately so that the current position of the business could be ascertained and there are proper records to refer to know amounts due from customers. Effective A/R accounting also helps the business take decisions to remind the customers for overdue payments as Accounts receivable generally forms a very important part of Working Capital Management for services companies and sometimes for manufacturing businesses too. Accounts receivable services generally refer to the entire cycle of receivables which ideally begin from invoicing to customers to marking payments against their due invoices. A good A/R accounting system also need to have a A/R ageing reporting in place which shall be reviewed in regular intervals both by accountants and the business manager, so that corrective measures could be take for over-due invoices and also to ensure that there are no double counting against any sales for which payments have been marked in records directly with a O/s AR invoice already in the system.

As the name suggests, if A/R is for amount due to the enterprise, Accounts Payable (A/P) is for amounts due to others by the enterprise. The way accounting is approached for A/P is similar to how an A/R accounting goes. A/P accounting would mean that the accountant records all vendor invoices (whether payment is already done or is expected to be done later) in the accounting books wherein all invoices which are due as on a date are recorded as A/P. The status of the A/P balances generally get squared off with payments being made by the enterprise for the amount due. Again, it is vital for a business enterprise to have a proper control on A/P status of the enterprise as this shall guide the business manager, the cash liquidity they need in near to midterm to settle the due invoices. So, in short having a proper A/P Management system would complement the Cash flow management system that is a very essential area of concern for businesses of all sizes and irrespective of the accounting methodology being followed (i.e. cash basis or accrual basis).

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