Finance & Accounting

Disparities between Accounts Payable vs Accounts Receivable

The accounting terms, account payable and account receivable, create confusion sometimes. It seems like they are the same, but their treatment is different. Both accounts are homogenous in nature in how they are recorded, but there is a difference between accounts payable vs accounts receivable. One represents an asset, and the other represents a liability for the company. Combining these two terms can lead to a wrong financial statement.

It is important to balance the assets and liabilities and shareholder’s equity according to the accounting equation. The basic accounting equation is:

 Assets = Liabilities + Stockholders’ Equity. 

What are Accounts Payable?

Before getting into the comparison of Accounts Payable Vs Accounts Receivable we must take a good look at the definitions of the terms.

Accounts payable or AP are short-term debts (less than one year) company pays to their creditors (vendors and suppliers). It includes product expenses, travel expenses, leasing, raw materials, transportation, and logistics.

Mainly, payroll and the overall cost of long-term debt and mortgage are not covered under this. However, a company should record the transaction of debt payment in the accounts payable. 

When both parties agree to payment terms, an invoice is issued and records the accounts payable based upon receipt of an invoice. It is recorded in the journal and posted to the general ledger^[1] as an expense after a finance team receives a valid bill for goods and services.

The balance sheet shows the overall amount of accounts payable under the current liabilities section but does not mention the detail of every individual transaction.

Accounts Payable Turnover Ratio

• The account payable turnover ratio is also called the payable turnover ratio. This ratio helps to measure short-term liquidity, which calculates the rate at which a company pays off its vendors or suppliers.
• The Payable turnover shows how many times a company pays off to its creditors during a period.
• Generally, the high ratio represents the company paying off suppliers faster. Conversely, the lower the ratio represents that a company pay off its suppliers for a longer time.

The formula of payable turnover ratio: – Net Credit purchasing / Average Accounts Payable

What are Accounts Receivable?

Accounts receivable or AR come under the current asset account. It helps to keep track of the money that third parties or debtors owe the company or individual. 

Debtors can be banks, companies, or individuals who borrowed money. Let’s understand with an Example: – the amount owed to an individual or a company for goods or services sold that the company provides to generate revenue.

Finance departments or merchants must be answerable for sending invoices on time, or they may receive late payments from their debtors or inconvenience customers. Also, they are accountable for sending follow-ups to avoid late payments.

Accounts Receivable Turnover Ratio

• The accounts payable turnover ratio is also called the receivable turnover ratio.
• It helps to measure how well a company handles their receivables or debtors.
• Generally, the higher the ratio, the faster the company receive the money and the lower the ratio, the worse a company handle cash receivables.

The formula of the Receivable turnover ratio: – Net Credit Sales / Average Accounts Receivable

While the debtor’s turnover ratio or receivable turnover ratio is typically calculated annually, some companies run the numbers more frequently, such as quarterly or monthly basis.

How to Record Accounts Payable vs Accounts Receivable?

For a valid comparison on Accounts Payable Vs Accounts Receivable it is important that we understand the recording of the two terms.

Record of Account Payable

For every business, transactions require a double-entry bookkeeping system, and it must always be a balance of debit and credit for all entries recorded into the general ledger. The account person credit the account payable when the invoice is received to record the transaction. The amount is debit for this entry to an expense account for purchasing the goods and services on credit. If the purchased item is capitalized asset, then debit can also be to an asset. The accountant debits account payable to decrease the liability balance when the company pays the amount. On the other hand, decrease the cash balance by recording the amount on the credit side of the cash account. 

A company always have many open payments due to vendors at a time. All o/s payments due to vendors or suppliers are made in accounts payable (AP). 

Therefore, if anyone sees the balance in the accounts payable section, they will see the overall amount the business owes all its creditors and short-term lenders. This total amount appears on the balance sheet on the liability side.

Record of Account Receivable

To record accounts receivable in the account, the account team has to generate an invoice and proceed further. The account team sends an invoice after selling a good and services to the customers and then records it into account receivable accounts to keep an accurate and up-to-date general ledger.

Record the payment transaction; a person must track the invoice weekly. If it doesn’t arrive, send the reminder to debtors when the company receives the payment, record it as received, and enter it into the receivables accounts. This is the responsibility of the accounts team to track the invoice; if its payment does not arrive, they will be answerable for not settling the accounts on time.

Difference between Accounts payable vs Accounts receivable

For comparing accounts payable vs accounts receivable, we need to differentiate between these two concepts;

Account Payable (AP)	Account Receivable (AR)
AR (Accounts receivables) are the expected cash to be received for the sales of goods and services made on a credit basis.	Accounts payable is the cash paid to creditors for purchasing raw materials or services.
It is the amount that the customers owe it.	AP is the amount that the company owes to the suppliers.
Accounts receivable falls under the current assets side.	Accounts payable falls under the liabilities side under current liabilities.
AR are the amount owed to the entity or a company.	Accounts payable (AP) is the amount owed by the company.
For selling goods and services, AR accounts are made.	Accounts payables are made because of purchasing material on credit.
An increase in Accounts receivables leads to a decrease in cash in the cash flow statement, and a decrease reflects an increase in cash.	An increase in accounts payable lead to a positive cash flow.
The elements of Accounts receivables are debtors and bills receivables.	The elements of accounts payable are bills payable and creditors.

Conclusion

Accounts Payable vs Accounts Receivable are different, but both are important for balancing the company’s accounts. Accounts payable and accounts receivable are important for understanding a business’s financial position. Classifying where the expenses belong is important to measure the company’s profitability.

A company that always keeps track of accounts payable and accounts receivable will be able to find where its money is going and from where it’s receiving the money in the business and how to be more cost-efficient. For the time being, a business monitors its profitability and follows up on invoices past the due date. It will help if the company use accounting software to manage the liabilities and assets related to the business.

Read Our Article: Guide to Foreign Liabilities and Asset Return Filing