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Accounts payable versus accounts receivable.
Accounts payable and accounts receivable sound like heavy finance terms, but really they just mean who owes who.
Accounts payable equals money you still owe. That could be a lighting designer or someone you hired to edit a video. It’s basically a bill waiting for you to pay it.
Accounts receivable is money owed to you, like a grant you’re waiting on, or a co-presenter who hasn’t sent their check yet. These are dollars you’ve earned, but haven’t hit your account.
Why does this matter? Because your bank balance doesn’t always tell the truth.
If you’ve got receivables pending, you might feel broke, even though money is on the way. And if you’ve got a pile of payables, your account balance might look better than it really is.
Easiest way to think about it, check your Venmo. Payables equals who’s waiting on you. Receivables equals who still owes you back.
Knowing both sides keeps you from being surprised when the bills or payments finally show up.
What is Accounts Receivable? What is Accounts Payable?
Accounts Receivable is a category for money that you know is coming, but hasn’t arrived yet. It’s a type of asset (thing you own) and it shows up on your balance sheet. It’s money you will receive in the future. You might hear it abbreviated to “AR”.
Accounts Payable is another category for money in the opposite situation. You owe it to someone but haven’t paid it yet. It’s a type of liability and it also shows up on your balance sheet. It’s money you will pay in the future. You might hear it abbreviated as “AP”.
Where do I find my Accounts Receivable and Accounts Payable?
If you’re using bookkeeping software, you can run a report called a Balance Sheet (“Statement of Financial Position”). Under Assets, you’ll see a line for “Accounts Receivable”, with an amount next to it. Under Liabilities, you’ll see a line for “Accounts Payable” with an amount next to it.
Take a look at this example Balance Sheet to see what we mean:
If you’re using spreadsheets to keep track of your finances, you’ll need to keep a list of money you expect to come in and money you expect to pay out, separate from money that’s already come in and that has already gone out. Or, if you keep all of that information together, you’ll need a way to filter out and separate what’s already happened from what hasn’t happened yet.
What goes into Accounts Receivable and Accounts Payable?
Here are some common things that might be part of your Accounts Receivable:
- Single-year/short-term grants that have been awarded but you haven’t gotten the check yet
- The future years’ amounts from multi-year grants
- Invoices you’ve sent out for artist fees or contracted work
- Ticket sales that haven’t hit the bank yet
- Donations made through a donation platform that haven’t hit the bank yet
Here are some common things that might be part of your Accounts Payable:
- Invoices/bills you’ve received from performers, a/v techs, or your grant writer
- Invoices/bills you’ve gotten from service providers like the utility company, the hotel where you’re hosting a conference next month, or the venue you’re booking for your end-of-year holiday show
- An open credit card balance
- An outstanding loan or line of credit
What happens once the money gets paid?
A few things! From a cash management perspective, your bank account becomes more accurate. If you’ve received money, the balance goes up. If you’ve paid money, the balance goes down. Usually, over the course of a month or two, both of these things will happen.
From an accounting perspective, those chunks of money move from your Balance Sheet to your Profit and Loss. Let’s work through some examples to see how that works.
Let’s say you’ve been awarded a $5,000 grant from The Arts Foundation of Uranus, but they haven’t paid you yet. At the same time, you’ve got a bill from your grant writer for $250 and another one from the electric company for $30.
You would keep track of that $5k as an asset on your balance sheet under the category “Accounts Receivable”. The two bills would go on your balance sheet as liabilities under the category “Accounts Payable”.
Similarly, once you pay out the grant writer and the electric company, your Accounts Payable line on the balance sheet goes down from $280 all the way to $0. You mark the bills as paid in your bookkeeping system, and that creates expense transaction records for them, so now they show up as expenses in your Profit and Loss.
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