Difference Between Accounts Receivable and Payable
Accounts Receivable (AR) and Accounts Payable (AP) are two fundamental concepts in financial and managerial accounting, and they represent two different aspects of a company’s cash flow.
Accounts Receivable (AR):
Accounts Receivable are the amounts owed to a company by its customers for goods or services delivered or used but not yet paid for. This is essentially a credit that the company provides to its customers when it delivers goods or services upfront and collects payment at a later date. AR is considered an asset on a company’s balance sheet because it represents money that is due to the company.
Example: A company that sells furniture might deliver a dining table set to a customer, who agrees to pay for it 30 days later. The money that the customer owes for the dining table set becomes the company’s accounts receivable.
Accounts Payable (AP):
Accounts Payable, on the other hand, are the amounts that a company owes to its suppliers or vendors for goods or services received but not yet paid for. When a company receives goods or services upfront and agrees to pay for them later, the amount it owes becomes accounts payable. AP is considered a liability on a company’s balance sheet because it represents money that the company is obligated to pay.
Example: If the same furniture company orders wood from a supplier and agrees to pay for it 30 days after delivery, the money it owes to the supplier becomes its accounts payable.
In summary, Accounts Receivable represents money coming into a business (an asset), while Accounts Payable represents money going out of a business (a liability).
Example of the Difference Between Accounts Receivable and Payable
Let’s consider an example with a business named “Healthy Treats,” a company that makes and sells organic snacks.
Accounts Receivable (AR):
Healthy Treats sells $1,000 worth of products to a retail grocery chain, “BuyFresh”. BuyFresh takes delivery of these products but will pay the invoice in 30 days. This $1,000 is recorded in Healthy Treats’ Accounts Receivable. It represents money that BuyFresh owes to Healthy Treats for the products they have received but not yet paid for. Until BuyFresh pays the invoice, the $1,000 will remain in Accounts Receivable, marking it as an asset for Healthy Treats.
Accounts Payable (AP):
To make its snacks, Healthy Treats orders $500 worth of organic almonds from a supplier, “FarmFresh Nuts”. Healthy Treats receives the almonds but has an agreement to pay the invoice in 30 days. This $500 becomes an Accounts Payable for Healthy Treats. It represents the money that Healthy Treats owes to FarmFresh Nuts for the almonds they have received but not yet paid for. Until Healthy Treats pays the invoice, the $500 will remain in Accounts Payable, marking it as a liability.
So in this example, Healthy Treats has $1,000 in Accounts Receivable (money coming in from BuyFresh) and $500 in Accounts Payable (money going out to FarmFresh Nuts). This shows the fundamental difference between these two accounting terms.
