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Decoding Accounting Terms – Accounts Receivable and Accounts Payable

Posted by Mike Nguyen on November 30, 2017 at 9:00 AM

Accounts Receivable and Accounts Payable are both critical to running your business. But these two accounts can get tricky if you're not familiar with accounting.

By the end of this article, you will not only know what they are and what they do, but also how to properly manage both of these accounts in correlation to your invoices and expenses through Kashoo! 

A quick tip on how to remember which is which: A/R is when a client owes you money and you need to collect. A/P is when you owe a supplier money and you need to pay them. Pretty straightforward, right? In Kashoo, A/R is seen as "Unpaid Invoices" and A/P as "Unpaid Bills".

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Making Sure You Get Paid

Let's explore A/R first because who doesn’t like getting paid? Your A/R account is used to track the amount of money your clients owe you.

For example, it’s January 1st and you provide a service or product and then allow your client 90 days to pay the invoice. This means your client has until the end of March to pay the invoice, and until that time, the owing amount will sit in A/R. Once the payment has been made, the amount will be transferred out of A/R and into your bank account.

Entering The Transaction in Kashoo

When you are entering in a transaction that requires the use of either accounts, be sure not to select the account twice. Reason being, A/R and A/P are already linked to the appropriate accounts in Kashoo. For instance, when you’re entering an income (a paid invoice) you would select the client, which bank account the funds went into, and the date the funds were deposited. Here’s where it gets slightly confusing: The category selection. Typically, a sales income should be selected here because you want to record your income. You WOULD NOT select A/R because the amount due has already been paid.

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If you’re creating an Invoice that hasn’t been paid for, it is the same steps as recording an income but you won’t need to select a bank account. The amount will then automatically go into A/R. That is why A/R is listed as "Unpaid Invoices" in Kashoo!

Paying Your Bills

Now onto A/P; the money you owe to your suppliers. Same sort of deal, if you’re not paying for a product or service right away, the amounting owing would go under your A/P account.

Say you’re entering in an expense—it’s April 1st (April Fool’s) and your plumber bill isn’t due for 90 days. Meaning you have until the end of June to pay. The owing amount would go to A/P until it has been paid.

Keep in mind, it’s always good to take full benefit of the term agreement. When you do this, it can increase your company's cash flow as well as decrease your borrowing costs. 

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Your unpaid bills can be seen in the—big surprise—"Unpaid Bills" section. The affected accounts would be A/P, and in most cases, an expense account. However, if you’re recording an expense that has already been paid, A/P would be replaced with a bank account or whatever the payment method.

Some insightful tips from our Controller here at Kashoo:

"Cash is always king. A/R and A/P is your way to manage cash efficiently. AR, making sure that you collect money as soon as possible. AP is making sure you use other people's cash to run your business, taking advantage of account terms vs paying right away.”

Some Clarity...

As simple as it seems, A/R and A/P are actually often the accounts that business owners struggle with the most. Kashoo simplifies these account names—"Unpaid Invoices" and "Unpaid Bills"—and makes them easily distinguisable for our users. With the individual dedicated sections, you can  keep track of any payments, to or from your account, that are overdue. Register for a free trial with Kashoo today and see just how efficient it is to manage all your accounts! And if you need extra help, make sure to check out our upcoming free workshops.

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Topics: Accounting Basics