Difference Between Accounts Payable and Accounts Receivable

Accounts Payable vs Accounts Receivable
 

Accounts payable and receivable are two important factors in the decision making of working capital and, therefore, it is valuable to know the difference between accounts payable and accounts receivable. Every business organization typically deals with numerous credit transactions in its day-to-day activities. As a result of these credit transactions, accounts accounts payable and receivable take place. Both, accounts payable and receivable, are balance sheet items, so calculated as at to a particular date, not for a particular period. Major difference between accounts payable and receivable are that account receivable exist as a result of credit sales and it is the total amount that the consumers have to pay off to the business. On the contrary, accounts payable exist as a result of credit purchases and it is the total amount owed by the organization to the external suppliers. Both accounts receivable and accounts payable correlates with the cash flow of an organization; thus, they are identified as important in decision making related to working capital.

What is Accounts Receivable?

Accounts receivable is the total amount owed by the customer to a business organization as a result of selling goods or services on credit basis. Therefore, the organization has the right to collect this amount from its customers in an agreed future period, thus known as an asset of the business. It is reported under current assets in a balance sheet. 

What is Accounts Payable?

Accounts payable is the total amount that is owed by the business organization to its suppliers as a result of purchasing goods or services on credit basis. Therefore, the organization is responsible and legally bounded to pay that amount to the suppliers in a predetermined future time, thus identified as a liability of the business. It is reported under current liabilities in a balance sheet.

Accounts Payable and Receivable in Balance Sheet

Similarities between Accounts Payable and Accounts Receivable 

• Both accounts receivable are payable are recorded in the balance sheet of the final accounts.

• Both affects to the cash flow of the business organization, and therefore, it helps to manage financial position of a business

• Both calculations are used make working capital decisions by the managers

What is the difference between Accounts Payable and Receivable?

• Accounts receivable is a short-term (current) asset; accounts payable  short-term (current) liability.

• Accounts receivable takes place as a result of credit sales  and accounts payable takes place as a result of credit purchases.

• Accounts receivable is the amount to be collected by the organization and accounts payable is he amount to be paid by the organization to the outside suppliers.

• Accounts receivable leads to generate future cash inflows to the organization, but accounts payable leads to future cash outflows from the organization.

• Accounts receivable is recorded in accounts receivable (debtors) sub-ledger  while accounts payable is recorded in accounts payable (creditors) sub-ledger.

Accounts payable and receivable are two key accounting terms which are determined by credit sales and credit purchases. The business organization that sells its goods to the customers on credit basis has the right to collect the respective amounts from the customers, which is known as accounts receivable, an asset. On the other hand, the business organization that purchases goods and services including raw material, bears the liability to pay off the respective amount to its supplier, which is known as accounts payable, a liability of the business.

Difference Between Accounts Payable and Accounts Receivable

 

Further Reading:

  1. Difference Between Account Payable and Note Payable