A basic element of bookkeeping and accounting for businesses are their accounts payable and accounts receivable. We are an Indianapolis Bookkeeping business and over the years, I’ve met many small business owners that confuse the two elements, sometimes leading to inaccurate records. There is an easy indicator in there. Accounts payable are what you still have to pay for, or owe. Accounts receivable are those customers or clients you still expect to receive money from. Helping small business owners understand the difference is vital, but there’s more still to discuss.

Accounts payable and receivable are often used as a general concept, rather than an account in your books because you’re tracking the money you owe and are owed by the client or customer, your books should also reflect that. If we here at Books By Brix are handling accounting for Gary’s Garbage, and we have recently billed them, we would increase our Accounts Receivable – Gary’s Garbage or some similarly named accounting rubric, to show that not only are we owed payment, but that we are tracking it specifically for Gary’s Garbage. On the opposite side, if Gary’s Garbage has handled trash removal services for our office, we would similarly accumulate those costs in an account likely named Accounts Payable – Gary’s Garbage, and reduce the balance as we pay for those services fees.

That really brings us to our next element of tracking accounts payable and accounts receivable. Income and Liability are allocated to these accounts, and their balances are reduced as income is received, or the liability is paid. Using our examples above, an entry for amounts we have billed Gary’s Garbage for would go in the books as a credit to sales, and debit to accounts receivable. This indicates that we are certainly expecting Gary’s Garbage to pay us, in the future, for services rendered. An entry for Accounts Payable would be a Debit to an operating expense, potentially Waste Removal Expense, and a Credit to Accounts Payable – Gary’s Garbage.

Handling the opposite of these entries is a little different. We still use double entries to track how we handle the expense. When paying Gary’s Garbage for those services rendered on credit, we would debit Accounts Payable – Gary’s Garbage, and credit our Cash Account, or similar liquid asset we are using to pay for the services. The accounts receivable entry would be to credit Accounts Receivable – Gary’s Garbage, and debit our Cash Account, or again our liquid asset account.

Ultimately, this means that making sales on credit, or purchasing merchandise or services on credit leads to a longer transactional tracking process, but is necessary to ensure that records are accurate and up to date. Of course, paying your expenses, or getting paid sooner can be a benefit, and it may make sense for your business to offer terms such as 2/10 net 30. What this means, is that if the bill is paid within 10 days, you may offer, or receive a 2% discount, but that the bill must be paid within 30 days overall. So if you have any additional questions please Contact Us here at Books by Brix, your premiere Indianapolis Bookkeeping Company today!