Differences Between Accounts Payable and Receivable

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.

What are Accounts Payable?

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.

AP Example: How to Record Accounts Payable 

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:

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:.

What is Accounts Receivable?

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.

AR Example: How to Record Accounts Receivable?

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: 

Similarities Between Accounts Payable and Accounts Receivable

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:

• Both are recorded in a company’s general ledger
• Both provide an overall picture of the company’s financial condition
• Both are crucial for optimising accounting practices, generating improved reporting, managing cash flow, and boosting working capital.

Major Difference Between Accounts Payable and Receivable

The differences between accounts payable and accounts receivable can be as follows-

Accounts Payable vs Accounts Receivable: Which is Easier?

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.