Every business must maintain a balance sheet of transactions made throughout the financial year. This includes the earnings and spendings of the establishment. Without tracking this, there is no way of telling if a business is making a profit, breaking even, or just losing money.
Without a well-maintained balance sheet, a business cannot function. Thus, tracking both receivable and payable accounts is very important. To understand it further, first one needs to understand what Accounts Receivable and Accounts Payable are.
All payments owed to a business, whether from buyers or as returns or interest, is known as Accounts Receivable. This is mentioned as current assets in a company’s balance sheet as it can be readily converted to cash in under a year. There are a few different kinds of Accounts Receivable –
- Notes Receivable – This is similar to a promissory note that is usually paid out within a window of 2 months. The customers buy items with the promise of paying the total or partial amount by a certain period of time through these notes.
Sometimes, these can be extended to up to a year, depending on the relationship shared with the customer.
- Trades Receivable – These are amounts due as a part of selling company assets. If your business makes a sale of old equipment and receives monetary compensation, it goes into this particular account.
- Bad Accounts – This is a lost battle. These are amounts that cannot be recovered. Some losses made on this can be recovered through tax deductions.
Accounts Payable is also referred to as the liability of a company as this is the money owed to either vendors, suppliers, or other sources. It is important to keep a trail of this account so as to know how much money a business is bleeding out. Accounts Payable also includes payments made towards the purchase of business equipment, raw material, supplies, etc. it is an accurate measure of the intake capacity of a business.
Purchase order, vendor payments, contracts, etc. fall under the purview of your business’s Accounts Payable. It is also important to maintain this meticulously for future audit needs. Vendor names and account numbers for each purchase, a separate invoice number along with the expense type and receipt date are a part of this account, and it helps keep track of payment deadlines and status.
Even in the case of Accounts Payable, the schedule is kept short term and always less than a financial year in order to keep the ledger up to date.
Importance of Tracking Accounts Receivable And Payable
Healthy cash flow is an essential part of every business. Your Accounts Receivable and Payable together constitute your cash flow. Keeping them up to date ensures that your cash flow remains on the positive end.
Maintaining your accounts receivable and payable also means keeping track of who your business owes money and who owes you money. Keeping track of this allows you to understand if your business is making a profit or bleeding out. It also allows you to understand how much capital you can afford to infuse into your business for further growth.
Importance Of Accounts Receivable
Accounts receivable is the indicator of the fact that a business is successfully getting clients and keeping them while adding more to their ledger. Receivables are considered assets that can be encashed when needed by the business.
Accounts receivable is also often used by businesses to attract investors. Investors like to know that a business can help them recover at least the primary investment. By having your accounts receivable in order, you can get more funding to expand your business.
In case of a slow phase, receivables can be used as collateral to acquire loans or sold off to arrange for the capital infusion the business needs. Accounts receivable is also a measure of a business’s liquidity, and in case of an emergency, these assets can be immediately sold off to make cash. In short, receivables are a business’s safety net, and unless they are tracked, a business can neither be successful nor be dependable.
Importance of Accounts Payable
Maintaining a good line of credit for any business today is essential. Without a well-maintained Accounts Payable, no financial institution will be willing to give out loans to a business. By tracking your payments and making them on time, you can ensure a good enough credit score to warrant a loan when you truly need it.
Payables are also known as liabilities and usually are not seen as a promising sign of progress in the business. Pending payables is a sign of a weak business. This leads to suppliers and vendors, banks and creditors losing faith in your business’s ability to make payment. This usually leads to either a credit crunch or poor services.
Maintaining Accounts Receivables and Payables As Tax Filing Requirements
Cash flow is an important aspect of filing for your GST. If you have not registered for GST yet, your business is at a serious disadvantage. For the GST registration certificate download, one must first apply for it.
This certificate will be widely used over all your GST transactions. During the signing of the registration form and all other GST related online work, one must use an electronic signature called the GST emsigner. It acts as a thumbprint and prevents identity fraud with respect to your transactions.
When filing for your GST, and claiming any returns or refunds, one must disclose the contents of their Accounts Receivable and Payable. Once that is all duly filled, your papers are processed within a fixed time window.
Maintaining A Clean Image
Your Accounts Receivable and Payable do not just help you keep track of your business direction and turn a profit, it also helps you run a clean business. In turn, it helps with an honest, “what you see is what you get” image with vendors and clients alike. That is goodwill worth maintaining the cumbersome paperwork for as at the end of the day, it is that goodwill that will earn your business its brand value.