Post Date: 08-09-2022

Accounts Payable vs Accounts Receivable: What’s the Difference?

Accounts payable and accounts receivable are two important factors that help to maintain the balance of a business. If a healthy equilibrium between revenues and expenses is maintained, a business garners new opportunities to expand and grow. It also helps to maintain a positive relationship with its suppliers and customers.

A company's Accounts Payable (AP) ledger list includes its short-term liabilities, such as commitment towards packages purchased from its suppliers and the money owed to its creditors. Accounts Receivable (AR), on the other hand, are funds expected by the company from its partners and customers. On the balance sheet, it is mentioned as a current asset. Keep reading to know more.

What is Accounts Payable (AP)?

Accounts Payable of a company is the amount it owes to its creditors and suppliers for their products and services purchased and invoiced. It does not comprise the payroll or long-term debt like a mortgage (except for some payments with long-term obligations). Accounts payable are generally recorded on invoice receipts following the payment terms agreed upon by both parties while sealing the deal. The finance team receives a bill consisting of the items and services purchased. This is counted as a journal entry. Later it is posted as an expense to the general ledger. The individual transactions are not listed on the balance sheet. Instead, it only consists of the total amount of accounts payable.

The payment is issued following the contract terms after the authorized official signs the listed expense. This generally takes around 30 to 60 days. The accounting team is in charge of recording the cost paid. Processing invoices and expense reports and ensuring timely payments fall under the responsibility of the Accounts Payable department. Qualified and skillful members of the Accounts Payable team help to maintain a positive relationship with their suppliers by ensuring that the suppliers' data is correct and up-to-date. Besides this, they also look over the payments and see if they are paid on time.

An AP team helps to save the brand's money by taking full advantage of the available discounts and favorable payment terms. Furthermore, effective AP practices assist in boosting business growth. They also help to manage cash forecasts, minimize mishaps and frauds, and generate reports for the business runners and other parties.

How to Record Accounts Payable?

There are two methods of recording Accounts Payable: accrual and cash-basis accounting methods.

  • Accrual Accounting: Here, the finance team will record all the unpaid expenses and act as the placeholder for cash events.
  • Cash-basis Accounting: In this method, a company records the expenses when it is actually paid to the suppliers.

One of the most important responsibilities of the finance team includes tracking the ‘Days Payable Outstanding’ (DPO). This implies the average day taken by a company to complete payments to its suppliers and creditors. To calculate the DPO of your company, you need to start with the average accounts payable for a mentioned period and, after that, monthly or quarterly.

What is Accounts Receivable (AR)?

Accounts Receivable of a company are the funds that the customers owe to the company for their items or services already invoiced. On the balance sheet, current assets hold the total value of all the accounts receivable and the purchase invoices of the clients under the credit section.

The suppliers generally bill their customers after providing them with the required services or products as per the terms that both parties mutually agreed to while issuing the purchase order or signing the contract. The terms generally vary from net 30, net 60, and sometimes even net 90 days. The extension period depends on the company. The only exception is during large orders when companies generally prefer a deposit upfront. After the company delivers standard products or services to the client, the Accounts Receivable team will generate an invoice for the customer and record it as an account receivable.

How to record Accounts Receivable?

Recording Accounts Receivable can be classified into various categories based on ratios:

  • Accounts receivable turnover ratio: It measures how smoothly a company converts its accounts receivable into cash in a limited period of time.
  • Current ratio: This measures liquidity, i.e. whether a company can pay its short-term obligations with liquid assets or cash within a year.
  • Days sales outstanding (DSO): It represents how long the customers take to pay the company for their services or products.

Key differences between Accounts Payable and Accounts Receivable

Accounts Payable (AP)

Accounts Receivable (AR)

AP is considered as a liability.

AR is considered as an asset.

It is the Client’s record.

It is the Vendor’s record.

It is the money to be paid.

It is the money to be received.

It is recognized as a liability until paid.

It is recognized as an income unless given out.

Auditors mostly look for quantity errors or unethical behaviors of the vendor.

Auditors mostly track customer accounts whose dues have passed beyond 120 days.