Accounts Payable vs Accounts Receivable

Accounts payable and accounts receivable are two sides of the business that are related to the expenses and revenue of the business.

There should be a healthy equilibrium between revenue and expense. It helps the business maintain cordial relationships with suppliers and customers.

From the lender’s and investor’s point of view, the AP and AR provide information about the financial health of the company.

It helps to track the operating income and whether it can meet the short-term liabilities or not. Disbalance on either side can affect the credibility of the business.

What is Accounts Payable (AP)?

Accounts payable represents the amount payable to the supplier and creditor of the company for goods or services purchased on credit and invoiced for one accounting period.

However, payroll and long-term debt is recorded on the receipt of the invoice based on the payment terms. All the amounts due to third parties for credit purchases are recorded as AP. It is reported under the heading “current liabilities” in the balance sheet.

What is Accounts Receivable(AR)?

Accounts Receivable is the amount owed by a company to customers for goods or services sold on credit and invoiced for one fiscal year. It is reported under the heading “current assets” on the assets side of the balance sheet.

Accounts Receivable is an essential and important aspect of any business. When a company delivers a good or service on credit to the customer, the AR team issues an invoice to the customer and records the same as AR.

Difference between Accounts Receivable and Accounts Payable 

Following are the key difference between accounts receivable and accounts payable :

• In layman’s terms, AP and AR are the two sides of a coin; one side shows the amount payable to suppliers and creditors, or AP. The other side shows the amount due from the customers, known as accounts receivable, or AR.
• AP is classified as current liabilities of the company, whereas, AR is classified as current assets of the company. Both are compared on a continuous basis as a measure of liquidity to check the availability of funds to meet short-term expenses. The current ratio and quick ratio are liquidity ratios used for comparison.
• Accounts receivable are available for offsetting the allowances for doubtful debt, while accounts payable are not available for such offsets.

Why are accounts receivable and payable important?

Late payments are a major concern among small businesses across the world. But why? because it adversely affects the cash flows and ends up with working capital tied up on the balance sheet.

This excess working capital could be potential funds for investments in growth, new product development, and/or boosting returns.

Optimization of the AR helps to maintain steady and healthy cash flows. As a result, the business will have sufficient cash to meet the expenses.

Thus, timely obligating the AP helps to maintain healthy relations with the company’s suppliers and creditors.

Streamline the accounts receivable and accounts payable process:

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