Accounts payable and receivable introductions

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Chennai - 600 004.Tel: +91 - 44 - 2498 4821

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Bangalore - 560 001.Tel: +91 - 80 - 6546 2400

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Tel: +91 - 422 – 6552921

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ACCOUNTS PAYABLE AND RECEIVABLE INTRODUCTIONS

A.VALLIACOUNTS DEPARTMENT



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


Accounts Payable Introduction

Accounts Payable is nothing but a Money owed by a company to its creditors.

When a company orders and receives goods or services in advance of paying for them, we say that the company is purchasing the goods on credit.

The supplier or vendor of the goods/services on credit is also referred to as a creditor.

If the company receiving the goods does not sign a promissory note, the vendor's bill or invoice will be recorded by the company in its liability account as Accounts Payable or Trade Payables.

Accounts payable is a short term liability and to be paid within 3 months or less than a year.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


Accounts Payable as Short term Liability

• Accounts that are owed to suppliers who are referred as trade creditors as distinguished from accrued interest, rent, salaries, taxes, and other such accounts.

• Accounts payable are shown under current (short-term) liabilities in the balance sheet.

• Lenders and investors examine the relationship of these accounts to the firm's purchases in order to judge the soundness of its day to day financial management.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


The Accounts payable needs to be reviewed with the following documents:

• Purchase orders issued by the company• Receiving reports issued by the company• Invoices from the company's vendors• Contracts and other agreements

This means that before a vendor's invoice is entered into the accounting records and scheduled for payment, the invoice must reflect:

• what the company had ordered• what the company has received• the proper unit costs, calculations, totals, terms, etc.The accuracy and completeness of a company's financial

statements are dependent on the accounts payable process.

ACCOUNTS PAYABLE PROCESS



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


Contn..

A well-run accounts payable process will include:

• The timely processing of accurate and legitimate vendor invoices,• Accurate recording in the appropriate general ledger accounts, and• The accrual of obligations and expenses that have not yet been completely processed.

The efficiency and effectiveness of the accounts payable process will also affect the company's cash position, credit rating, and relationships with its suppliers.

To safeguard a company's cash and other assets, the accounts payable process should have internal controls. A few reasons for internal controls are to:• Prevent paying a fraudulent invoice• Prevent paying an inaccurate invoice• Prevent paying a vendor invoice twice• Be certain that all vendor invoices are accounted for



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


Accounts payable Three-way match

• The accounts payable process often uses a technique known as the three-way match to assure that only valid and accurate vendor invoices are recorded and paid. The three-way match involves comparing the following information:

• The description, quantity, cost and terms on the company's purchase order.

• The description and quantity of goods shown on the receiving report.• The description, quantity, cost, terms, and match on the vendor

invoice.Only when the details in the three documents are in agreement will a

vendor's invoice be entered into the Accounts Payable account and scheduled for payment.

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Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


Accounts Receivable is nothing but a Money owed to a company by its debtors.Accounts receivable is the money that a company has a right to receive because it had provided

customers with goods and/or services.For example, a service provider provides their services to their customer and the customer is

allowed to pay in 30 days. From the date of completion of services and invoice, until the company receives the money, the company will have an account receivable. Accounts receivables are also known as trade receivables.

Companies who sell on credit are unlikely to have liens on their customers' property. Hence, there is a risk that the full amount of their accounts receivable might not be collected. This means that companies need to cautious when granting credit and establishing an account receivable. If there is uncertainty of a potential (or existing) customer's credit worthiness, it is wise for the company to require the customer to pay in advance before delivering goods or services

contd..

Account Receivable Introduction



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


It is also important for a company to monitor its accounts receivable and to immediately follow up with any customer who has not paid as agreed. An aging of accounts receivable is a tool that will help and it is readily available with most accounting software. A general rule is that the older a receivable gets, the less likely it will be collected in full.

Accounts receivable are reported as a current asset on a company's balance sheet. Good accounting requires that an estimate be made for the amount that is unlikely to be collected. That estimate is reported as a credit balance in a related receivable account such as Allowance for Doubtful Accounts. Any adjustments to the Allowance balance will also be recorded in the income statement account Uncollectible Accounts Expense.

contd..

Account Receivable



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


Credit Policies

• To increase the likelihood of selling to customers who will pay on time, companies develop control procedures and maintain a credit department.

The credit department examines the following details:

• Examines the financial resources and debts of the credit applicant

• Asks for personal reference• Get credit rating from credit bureaus• Determine the extent to which the company can

grant credit



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


contd…



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


UNCOLLECTIBLE ACCOUNTS

• Some receivables will never be collected and must be written off as uncollectible.

• The uncollectible expense is place on the income statement as a selling expense and also it will decrease the profit of the company

• For example if a AR period is provided as 30 days (1 Month), and we shall can receive payment within 3 months. Sometimes it may extend upto 6 months to one year. If it goes beyond one year, it may be considered as bad debts and to be written off.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


Difference between AP & AR

• Accounts payable are amounts a company owes because it purchased goods or services on credit from a supplier or vendor. Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer.

• Accounts payable are liabilities. Accounts receivable are assets.

• Let us assume that Company X sells merchandise to Company Y on credit. (Perhaps the invoice states that the amount is due in 30 days.) Company X will record a sale and will also record an account receivable. Company Y will record the purchase (perhaps as inventory) and will also record an account payable. Company X has a sale and a receivable, Company Y has a purchase and a payable.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


Contn..



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


Law

Accounts payable and receivable introductions