As a business owner, knowing the difference between accounts payable vs accounts receivable is important. Whether you do the books yourself or hire an in-house bookkeeper, understanding important terms like accounts payable and accounts receivable can help ensure the work is being done properly.
In short, the basic differences between the two terms is:
- Accounts Receivable: Monies owed to your company for goods or services provided
- Accounts Payable: Monies owed by your company for goods or services received
Accountants and accounting software will often refer to the two terms as A/P (Accounts Payable) and A/R (Accounts Receivable) for short.
However, there is more to know about accounts payable and accounts receivable than the basics. And knowing the details on every aspect of accounting will help you make smarter decisions as you grow your business.
Accounts Payable Vs Accounts Receivable: Definitions And Details
In order to help you clearly understand accounts payable vs accounts receivable, we’re going to divide each term into two sections: definition, and details.
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Accounts Payable Definition
In short, accounts payable is a liability that a company records when a bill is received from vendors. The bill is typically for which monies are owed for goods or services rendered on credit. In other words, you have received the benefit of a service from a vendor for which you have yet to pay for.
Your company has goods and services it needs to buy in order to operate sufficiently. For example, you may receive an invoice for office cleaning at the end of each month for services that have already been provided.
When you pay the bill, you’ll record the payments against the outstanding bill. For the record, the bill should have been previously entered into the accounts payable section of your books.
Accounts Payable Details
Accounts payable numbers belong in the “liabilities” section of your books. It’s a liability because it’s a debt that’s owed, resulting from something you purchased for the company.
As mentioned earlier, that “something” could be a good or a service. Another way to understand accounts payable is that it’s a delayed payment of cash going out of your company.
It’s a bill your company has a responsibility to pay.
Here are some examples of accounts payable items your business might have:
- Office supply purchases such as paper, pens, and printer ink
- Repairs or upgrades to your building or tech items
- Services your business needs, such as internet service or equipment rental
- Purchase of large equipment items needed to run your business
- A vehicle you use at your business for the purposes of conducting business. (But only if that vehicle will be paid off in one year or less)
Note that while payroll is technically a company expense, it is recorded separately from accounts payable. Accounts payable is confined to money owed to your business’s suppliers. Your Payroll account will have its own set of sub-accounts such as salaries, payroll taxes, etc.
For that reason, payroll needs to be recorded separately from other types of debits your business pays out.
Accounts payable is considered a current liability. That means your company should pay it off within one year. Do you have outstanding debts that will take longer than one year to pay off? If so, they go in a separate category called long-term liabilities.
An example of a long-term liability is a mortgage payment on a building your business owns. Or a loan on business vehicles that will take longer than one year to pay off.
Accounts Receivable Definition
The Accounts Receivable section of your books holds records of monies owed to your company. In other words, money you have yet to receive for goods and services your company provided.
Accounts Receivable Details
Accounts receivable is an asset to your company and that is your client’s responsibility.
Its an asset to your company because it involves money due to come into your company. Remember that accounts payable is a liability that a company records when it makes a purchase for which money has yet to be paid. For example, money owed to a vendor for supplies for services or goods already received.
Accounts receivable is the opposite of accounts payable. In other words, accounts receivable results from something your company sold to a customer. It’s cash to come into — or should be collected by — your company.
To say it another way, accounts receivable is a current asset account that tracks monies owed to your company by a third party. Here are some examples of items that might go on your company’s accounts receivable column.
- Sublet invoices to a tenant which are on 30-day terms
- Consulting invoices sent to a client on 15-day terms
- Large retainer for legal services provided on 45-day terms
For instance, let’s say your company is a law firm and you provide legal services to your clients. You’ve worked several hours on their case for the month and you issue a monthly invoice with a 30-day net term.
In this case, you’ll put the amount due from that client for the legal fees due through your accounts receivables.
A Current Asset
Accounts receivable is considered a current asset. That means that the balance is expected to be received in full. Talk to your accountant if you have questions on accounts receivable funds that will take longer than one year to receive. They may or may not be categorized separately.
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Summarized List Of the Differences Between Accounts Payable vs Accounts Receivable
You’ve read the long version, now let’s summarize what we know about Accounts Payable vs Accounts Receivable.
|Accounts Payable (A/P)
|Accounts Receivable (A/R)
|Liability to the company
|Asset to the company
|Money the company owes
|Money the company will receive
|To be paid for goods/services purchased
|To be received for goods/services sold
|Cash to go out of your business
|Cash to come into your business
|Your company’s responsibility
|Your customers’ responsibility
Most importantly, is your company’s team recording Accounts Payable items and Accounts Receivable items correctly? If not, you may want to contact Cloud Friday staff for help in getting you on the correct (and profitable) accounting path.
Why Having Good Accounts Receivable And Accounts Payable Records Is Important
You may be wondering why it’s so important to understand and record accounts payable and accounts receivable items correctly. Why isn’t a simple list of credits and debits enough?
The answer to that question lies in the fact that analyzing these numbers regularly helps you keep a current handle on the financial health of your business. And knowing what these accounts look like on a steady basis can help you determine early if there is a cash flow problem in your business.
For instance, let’s say you’ve got steadily rising accounts payable numbers without a coordinating rise in accounts receivable. That information could give you an early indication that your business is struggling.
Similarly, your accounts receivable information helps you see who owes your business money. It also helps you see who’s not paying, or not paying fast enough. Then you can contact delinquent clients if need be or offer discount incentives for fast or early payoff. That way you’re taking steps to help ensure you get your money.
In short, correctly recording and analyzing your accounts payable and accounts receivable numbers helps you figure out your company’s bottom line. In addition, it also helps you know how much your company would have in cash should you receive all due payments and pay all due debts.
The Accounts Payable and Accounts Receivable records for your business are an important part of accounting that helps you gauge the overall health of your business.
For that reason, having these two accounts recorded and analyzed properly is a necessity. Talk to our experienced accountants if you have any questions regarding Accounts Payable or Accounts Receivable. Or if you’ve decided it’s time to bring more experienced, professional accounting help to your team.
Cloud Friday’s accounting and business advisory team can help you organize your records, educate your team, and work with you to plan a path for company growth and success.
Contact us today using the contact page on our website. We’re happy to talk with you about how we can help you achieve a higher level of business success.