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Receivables and payables are financial transactions that represent money owed to a company by a third party or money owed by a company to a third party. These transactions are recorded in a company's accounting system as accounts receivable and accounts payable. Another way of thinking about receivables and payables is as an extension of credit, either from the company to its customers or from outside parties to a company.
Businesses accept many different types of payments for goods and services. The easiest method of payment is cash on delivery, or tendering full payment with the simultaneous exchange of products. Although cash on delivery is usually the optimal payment method for businesses, it does not provide the customer with much financial flexibility. To encourage customers to make purchases, many businesses allow them to buy on credit. Customers who buy on credit take immediate possession of goods or services on a promise to pay at a later time.
There are two types of credit that a business must keep track of through its accounting system. The first type is extended from the business to its customers. This is tracked on a company's books as receivables, or money that the business expects to receive at some point in the future. Tracking an extension of credit as a receivable allows the company to record the reduction in inventory pursuant to a sale, while also recording the reason for the deficit in cash collection.
The second type of credit that a business tracks through its accounting system is that which is extended to it from other businesses. For example, some businesses have credit accounts with their suppliers, allowing them to order inventory without having to pay for it until some point in the future. This gives the business cash flow flexibility, because it can often sell the inventory before it has to pay. The payments that a business owes for goods or services it has received on credit are tracked in its accounting system as payables.
Many large businesses have departments that are specifically dedicated to handling receivables and payables. Although receivables and payables are tracked within the company's books, these financial transactions also come with a relational component that requires ongoing management. Extensions of credit to customers often requires regular correspondence through account statements and reminders to pay. Likewise, a company's credit relationships with outside parties require constant attention to make sure payments are made on time or extensions of time to pay are requested.
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