Accounts payable and accounts receivable are two fundamental concepts that governs business’s financial operations. Understanding these two concepts is crucial for businesses that wish to gain insights into their accounting process.
Lenders , investors and other stakeholders often analyse the accounts payable and accounts receivable equation to learn and access a business’s financial condition. Businesses can achieve success and build positive relations with their customers and suppliers when maintaining a healthy equilibrium between receivable (related to revenues) and payable (related to expenditures).
This article explains all about accounts payable and accounts receivable, including examples, how to record them, similarities and differences.
Accounts payable (AP), also labelled as current liabilities, refer to the funds that a business is yet to pay to its suppliers or creditors. AP is usually recorded upon receipt of an invoice containing mutually agreed payment terms. Upon receiving a bill for goods and/or services, the finance team records it as a journal entry and posts it to the general ledger as an expense.
The balance sheet indicates the total amount of accounts payable without listing individual items. The accounting team marks the expense as paid once an authorised approver signs the expense and the payment is initiated according to the contract’s payment terms, such as net-30 days or net-60 days.
A popular clothing brand, Infinity Fashion, ordered 600 dyed t-shirts worth Rs.1,20,000 from its wholesale supplier, Lush Clothing, which then sent an invoice on May 12 with net-60 payment terms and no early payment discounts.
Infinity Fashion’s bookkeeper creates an account payable journal entry as below:
Date | Particulars | Debit (Dr) | Credit (Cr) |
12-May | Inventory (T-shirts) | Rs 1,20,000 | |
Accounts Payable ( Lush Clothing ) | Rs 1,20,000 |
Later, on July 11 it initiates payment of Rs.1,20,000 to Lush Clothing’s bank account. Here’s the entry for that transaction:.
Date | Particulars | Debit (Dr) | Credit (Cr) |
11-July | Accounts Payable ( Lush Clothing ) | Rs 1,20,000 | |
Bank account | Rs 1,20,000 |
Accounts Receivable (AR) is considered as current assets. It refers to the funds received from customers against invoiced products and/or services.
After providing customers with products and/or services, businesses usually issue bills based on mutually agreeable payment terms. The AR team is responsible for invoicing the customers and recording the invoiced amount as accounts receivable and payment terms.
Lush Clothing identifies Infinity Fashion as a valuable customer and offers them a net-90 days term on all new purchase orders above Rs.1,00,000.
When Infinity Fashion accepts the offer and makes an order worth Rs.1,00,000, Lush Clothing ships the order and records Rs.1,00,000 as an asset in accounts receivable, expecting the full payment of the invoice within 90 days (mutually agreed payment term) of the receipt of the t-shirts.
Below is the journal for the transaction:
Date | Particulars | Debit (Dr) | Credit(Cr) |
12 May | Accounts Receivable (Infinity Fashion) | 1,00,000 | |
Sales (Revenue) | 1,00,000 |
On a transactional level, each invoice is payable to one party and receivable to the other. Both accounts payable and receivable have the following commonalities:
The differences between accounts payable and accounts receivable can be as follows-
Accounts Payable | Accounts Receivable |
Funds to be disbursed | Funds to be received |
Recorded as current liabilities on the balance sheet | Recorded as existing assets on the balance sheet |
Client’s record | Vendor’s record |
Identified as a liability until paid | Identified as an asset until received |
Impacts cash outflow | Impacts cash inflow |
Accounts receivable is mostly considered easier to handle than accounts payable.
Accounts receivable involves tracking money owed to a company by customers, which is relatively straightforward. In contrast, accounts payable involves managing the company's debts to suppliers and creditors, which can be more complex.
It requires careful record-keeping, timely payments, and negotiation skills to maintain good vendor relationships. While both are essential for financial health, accounts payable often involves more variables, deadlines, and potential consequences for late payments, making it comparatively more challenging to manage effectively.