Accounts Payable vs. Accounts Receivable: What are the Differences?
In the world of business finance, understanding the difference between accounts payable (AP) and accounts receivable (AR) is crucial. Both play significant roles in managing a company's cash flow, but they serve opposite functions. Accounts payable represents money a company owes to suppliers, while accounts receivable represents money owed to the company by its customers.
What are accounts payable?
Accounts payable refers to the amounts a company owes to its suppliers for goods or services purchased on credit. This liability is recorded on the company's balance sheet and represents obligations that need to be paid within a specific period, typically within 30 to 90 days.
When to use accounts payable
Accounts payable is used in scenarios where a company procures goods or services on credit terms rather than paying cash upfront. This can include raw materials, inventory, utilities, rent, or professional services like consulting.
Examples of accounts payable tasks
- Processing invoices: Reviewing and verifying the accuracy of invoices from suppliers before recording them in the accounting system.
- Vendor management: Maintaining relationships with suppliers, negotiating terms, and resolving any discrepancies in invoicing.
- Payment scheduling: Ensuring that payments are made on time to avoid late fees and maintain good credit standing with suppliers.
- Reconciliation: Comparing statements from suppliers with the company’s records to ensure accuracy and completeness.
Learn how to automate the accounts payable process or view our accounts payable audit checklist
What are accounts receivable?
Accounts receivable is the exact opposite of accounts payable; it refers to the money that customers owe to the company for goods or services delivered on credit. This asset is recorded on the company's balance sheet and reflects the amount expected to be received in the short term, generally within 30 to 90 days.
When to use accounts receivable
Accounts receivable is used whenever a company extends credit to its customers, allowing them to receive goods or services immediately but pay for them at a later date.
Examples of accounts receivable tasks
- Issuing invoices: Creating and sending invoices to customers for goods or services provided.
- Collections management: Following up with customers to ensure timely payment, managing overdue accounts and handling any disputes.
- Recording payments: Entering received payments into the accounting system and updating customer accounts.
- Credit management: Assessing customer creditworthiness and setting appropriate credit limits.
Common questions around accounts payable and accounts receivable
Can the same person do accounts payable and accounts receivable?
In smaller businesses, it is not uncommon for the same person to handle both accounts payable and accounts receivable. However, in large, global organizations, these functions are separated to ease the workload,ensure accuracy and prevent fraud
Are accounts payable business expenses?
Yes, accounts payable represent business expenses that the company has incurred but not yet paid. These are recorded as liabilities until the payment is made.
Are accounts payable debits or credits?
Accounts payable is a credit entry in accounting. When a company receives a bill, it credits accounts payable (a liability) and debits the corresponding expense account.
How can Basware help?
To learn more about Basware’s AP Automation solutionsand how we can support all your accounts payable automation needs, contact us to speak to one of our solutions experts.