Accounts Receivable and Accounts Payable for Small Business

Accounts receivable and accounts payable, AP/AR in bean-counter jargon, is about business credit.

Credit makes the business world go round. An all-cash business has no receivables or payables, and the vast majority of businesses cannot get by as all-cash operations.If you give credit to your customers, then you have to track your accounts receivable, managing and collecting the money owed to your business by your customers. Having accounts receivable means you need to track invoices and credit notes issued to your customers and deduct payments they make. You also a need to make miscellaneous adjustments, such as interest charges on overdue accounts, chargebacks for NSF (not sufficient funds) checks, and so on.

Accounts payable, on the other hand, involves managing what your business owes to others. Now, theoretically AP can mean all your short-term payment liabilities including payroll and taxes, but we will focus on trade payables — normal business expenses such as raw materials, products for resale, and services. (Payroll is the subject of our payroll software and services buyer’s guide.)