Accounts receivable and payable and their relationship

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They are two large sectors of the fields of financial accounting and accounting in all its branches in general

And many organizations and companies have entire departments dedicated to these two functions.

➡️ What is meant?

Receivables ← Account receivable, are defined as a balance of funds owed to the Company by third parties for goods delivered or services provided that were not paid immediately by the Customer, and receivables are also defined as any amount that Customers owe the Company for purchase on the account.

Accounts payable ← Account payable are accounts within the general ledger and represent an obligation that the company incurs to pay a short-term debt to the company's creditors or one of its suppliers, and the common use AP refers to a section of the company responsible for the process of paying receivables owed by the company to others.

➡️ Where does it appear on your financial statements?

Both are part of your working capital, and they appear on your balance sheet

Accounts receivable → current assets

Accounts payable ← current liabilities

Transactions on these accounts appear in the cash flow statement in cash used in operating activities

➡️ What are the daily restrictions?

Accounts receivable → rise with debit, and fall with credit

Accounts payable → rise with credit, and fall with debit

➡️ Why is this type of calculation important?

Because these accounts can cause sharp fluctuations in your cash flows.

Accounts receivable ← the faster you collect your money, the less bad debt, and the more favourable your cash position will be.

Accounts payable← The more favourable your credit terms are with suppliers, the stronger your cash position will be.

Accounts payable← The more favorable your credit terms are with suppliers, the stronger your cash position will be.

Liquidity ratios are used to measure the company's ability to meet its short-term obligations on the due date, and the higher this ratio, the greater the company's ability to pay its debts, and this table shows the liquidity ratios used with explanations on them:

1- Trading Ratio = Current Assets / Traded Liabilities

This ratio measures the company's ability to repay its short-term liabilities from its current assets, and an increase in this ratio is a positive indicator of the ability to repay in the short term.

2- Fast Turnover Ratio = Current Assets - Inventory / Current Liabilities

This ratio measures the company's ability to meet its short-term obligations from its current assets, which are characterized by their rapid conversion to cash (the fastest liquidity), so that they exclude inventory due to their slow conversion to cash, as well as expenses paid in advance.

3- Cash ratio = cash current assets only / current liabilities

This ratio measures a company's ability to meet its short-term obligations from its cash assets only, excluding accounts receivable, receivables, inventory and prepaid expenses.

4- Net Working Capital = Current Assets - Current Liabilities

Net working capital represents the surplus of current assets over current liabilities, the increase of which indicates the Company's ability to repay in the short term.

These ratios measure how efficiently a company manages and uses the assets it has (inventory and receivables) to generate sales and make a profit.

1- Average collection period = 365 inventory or sales turnover rate

This ratio measures the number of days needed to collect payments from future sales and accounts receivable.

2- Inventory turnover rate = cost of sales / average inventory balance

It measures how quickly the goods are converted into cash by selling them, and the higher the turnover rate, the more this indicates the efficiency of inventory management and the quality of the goods sold, and by dividing the number of days of the year (365 days) by this ratio, the number of days required to sell the inventory will appear.

3- Turnover of receivables = net sales / average balance of receivables

It measures the efficiency of management in collecting its debts through forward sales, and the higher this percentage indicates the efficiency of collection management.

4- Fixed assets turnover rate = net sales / average total fixed assets

This ratio measures the efficiency of the company's management in investing and using its resources of fixed assets in order to generate sales, if it increases, it indicates the efficiency of management in using its assets to generate sales.

5- Asset turnover rate = net sales / average total assets

This ratio measures the efficiency of the company's management in investing and using its resources in assets to generate sales, if it increases, it indicates the efficiency of management in using its assets to generate sales

These ratios measure the company's ability to achieve profits, and identify the expected return on their money invested in the project.

1- Profit margin = Total Profit / Net Sales

This percentage refers to the total profit achieved by the company from each dollar sold.

2- Net profit to sales ratio = net profit / net sales

This ratio refers to the total profit achieved by the company from each dollar sold after deducting operating expenses.

3- Return on investment = net profit / average asset balance

It measures the contribution of invested assets to profit, and this ratio is used to compare profitability between companies of different sizes because this percentage is affected by the size of the company.

4- Return on equity = net profit / average equity

Measures a company's net profit on shareholders' investments.

Investors who want to buy shares and make profits use these ratios to make decisions about whether or not to invest, as these ratios measure the share of profits and shareholders' equity (ordinary shareholders).

1- Earnings per share = net profit / average number of shares

Refers to the profits achieved by the common stock.

2- Dividends per share = dividends distributed / average number of shares

Refers to the dividends made by the common share.

3- Cash Dividend Ratio = Dividends Distributed / Net Realized Profits

This percentage refers to the value of the cash dividends that the investor will receive from the dividends

4- Book value per share = ordinary shareholders' equity / average number of ordinary shares

Refers to the ordinary share of shareholders' equity (holders of ordinary shares)

These ratios measure the extent to which the company relies on debt to finance its assets and investments, and to know which sources of financing the company used to finance its assets, whether they are from internal sources from owners or from external sources from others (debts and loans).

1- Debt to assets ratio = total debts / total assets

This ratio indicates the extent to which short-term and long-term debts contribute to financing its assets, if it increases, it indicates that the company relies on debt to finance its assets.

2- Debt-to-equity ratio = total debt / net equity

This ratio indicates the extent to which the company relies on the debts of others compared to the shareholders' and owners' equity, and the higher this percentage indicates that the company depends on the debts of others more than on the contributions of owners to finance its needs.

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