Differences Between Accounts Receivable and Accounts payable
Account receivable is the amount which the company owes from the customer for selling its goods or for providing the services whereas accounts payable is the amount owed by the company to its supplier when any goods are purchased or services are availed.
In business, you need to purchase goods on credit and you also need to sell goods on credit. Since the business purchases and sells in bulk, it has to consider both credit purchase and credit sales.
- When you purchase on credit, you need to pay off a certain amount to your creditors. This amount that you owe as a business to your creditors is called accounts payable.
- On the other hand, when you sell on credit, you would receive a certain amount after some time from your debtors. This amount that you’re yet to receive is called accounts receivable.
Both of these are important for business because they both help a business know how much the business needs to pay off and how much the business would receive.
In this article, we will go through a comparative analysis between them.
Accounts Receivables vs Accounts Payable Infographics
- Accounts receivables are the expected cash to be received in the future for the sales that are made on a credit basis. Accounts payable is the cash that is to be paid to the creditors for the purchase of raw material or services
- Accounts Receivable is the amount that the customers of the company owe to it. On the other hand, Accounts Payable is the amount that the company owes to the suppliers.
- Both of them are a part of the balance sheet but accounts receivable falls under the current assets section while accounts payable falls under the liabilities section under current liabilities
- Accounts receivables are the amount that is owed to the company while accounts payable is the amount owed by the company
- Accounts receivables are created because of the selling of goods and services while accounts payables are created because of purchasing material on credit
- Receivables can be offset with an allowance of doubtful debts while payables have no offset
- In the case of Accounts receivables Money to be collected while in the case of Accounts payables money is to be paid
- Accounts receivables lead to an increase in cash flow while accounts payable leads to a decrease in cash flow
- Accounts receivables are the result of credit sales while accounts payable is the result of credit purchases
- Components of Accounts receivables are debtors and bills receivables while a component of accounts payable is bills payable.
- Accounts receivables are calculated as total sales minus returns and all the allowances and the discount given to the customers. The average Accounts receivables are calculated as beginning balance plus ending balance divided by two. Accounts payable is simply the total cost of purchases.
- For Accounts receivables, the accountability lies on the debtors while for account payables the accountability lies on the business
|Basis||Accounts Receivable||Accounts Payable|
|Meaning||Accounts Receivable is the amount that the customers of the company owe to it.||Accounts Payable is the amount that the company owes to its suppliers.|
|Position on the Balance sheet||Accounts Receivable is on the current asset of the balance sheet||Accounts Payable is on the current liability of the balance sheet|
|Offset||Receivables can be offset with the allowance of doubtful debts||Payables have no offset|
|Type of accounts||Receivables have only one category of account ie trade receivables||Payables have multiple categories of accounts like sales payable, interest payable, income taxes payable|
|Cause||This account is created because of the selling of goods and services||This account is created because of purchasing material on credit|
|Impact on cash flow||Results in Cash inflow||Results in Cash outflow|
|Action||Money to be collected||Money to be paid|
|Accountability||Accountability lies on the debtors||Accountability lies in the business|
|Types||Bills receivables and debtors||Bills payable and creditors|
They are two sides of one coin. Every transaction if it’s done on credit has to have an element of accounts receivable and accounts payable in it. If Company A sells on credit to Company B, Company A will be a creditor to Company B and Company B would be a debtor to Company A. That means, in one transaction there are both – AR and AP.
Understanding these two concepts is very important. Especially if you’re starting a business and you would do a lot of transactions on credit (or “on account”), it is important that you identify two sides of the same coin. Identifying accounts receivables and accounts payable will reduce a lot of headaches for the business upfront.
Video on Accounts Receivable vs Accounts Payable
This has been a guide to accounts receivables vs accounts payables. Here we discuss accounts receivables and accounts payables differences with examples, infographics, and comparison table. You may also have a look at the following articles for gaining further knowledge in Accounting –
- Days Sales Uncollected | Components
- Top Differences Between Accrued Expenses vs Accounts Payable
- Top Differences Between Accounts Payable vs Notes Payable
- Creditor vs Debtor Differences
- Types of Account Receivables Factoring
- Days Sales Outstanding (DSO)
- Days Payable Outstanding (DPO)
- Working Capital Ratio
- Average Collection Period Formula