Accounts payable vs receivable - differences and examples

Even the most proficient accountants can sometimes overlook the basic financial details, leading to companies paying hefty prices. It’s true that the latest automated solutions are making things easier for businesses, but there will always be a need for human staff to supervise the tasks.

Accounting personnel need information, such as the differences between accounts payable and receivable. This helps them spot red flags and resolve money-related issues before they arise. This article breaks down accounts payable vs. receivable with clear examples so you can micro-manage all the accounting tasks and have an upper hand in your finance matters.

Lenders and investors often review your accounts payable and receivable to understand how financially healthy your business is. Earning money is as important as smart spending. Both support growth and keep customers coming in, time and again. If either side is poorly managed, it can hurt your credit and put your business at risk in the long run.

While we dissect the discrepancies between the two, we’ll also touch on Wise Business, a cost-effective way to send business payments and receive money from abroad in multiple currencies, with conversions using the mid-market exchange rate.

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What Are Accounts Payable?

Accounts payable (AP) is the money your business owes to suppliers, vendors, or service providers for goods or services you’ve received but haven’t paid for yet. It’s considered a short-term liability on your balance sheet, meaning the payments are usually due soon, often within 30 to 60 days.

In simpler terms, when you buy something on credit, like office supplies, inventory, or professional services. It shows up as an accounts payable entry until you pay the bill. Below is what you should know about AP on your fingertips:

• AP is a liability: It tracks outstanding bills your business needs to settle.
• It’s part of double-entry bookkeeping:

• When you receive an invoice, you credit (increase) your AP.
• At the same time, you debit (record) the corresponding expense.

• Payment reduces AP: Once you pay off the invoice, you debit AP and credit your cash account.

An organized AP is your key to staying on top of your bills and maintaining good relationships with suppliers.

Real-Life Illustration of Accounts Payable

Tesco, one of the UK’s famous supermarket chains, can be a perfect example to explain this concept. They regularly purchase food and household goods from suppliers. Let’s take a sample of their transaction:

Tesco received a shipment of produce from a UK farm cooperative with an invoice of £250,000 due in 30 days. It’s recorded as:

• Debit: Inventory (for stock received)
• Credit: Accounts Payable (liability to the supplier)

When accounts payable are managed well, businesses like Tesco can keep things running smoothly without hurting their cash flow. Proper payment of these short-term bills does more than prevent late fees. It relays to your suppliers that you’re reliable, helping you crack better deals.

What is Accounts Receivable?

Accounts receivable (AR) is the money your customers owe your business for goods or services you’ve already provided. It shows up on your balance sheet as a current asset because it represents cash you expect to receive, usually within 30 to 90 days, depending on the payment terms you’ve agreed upon.

In simple terms, if you send an invoice to a client, it’s accounts receivable. Once they pay it, that amount moves from AR to your cash account. A few handy tips to manage AR effectively include:

Send clear, timely invoices with easy-to-understand payment instructions.

• Offer flexible payment options, like Wise Business.
• Use automated reminders to nudge customers before due dates.
• Segment your customers by payment behavior and follow up accordingly.

AR is also a measure of your business’s liquidity. It shows how quickly you can turn those business assets into cash. This makes it easier to make changes in sales or purchases, like those in pricing, if and when required.

Real-Life Illustration of Accounts Receivable

Sweet Treats Ltd., a UK-based artisan bakery, supplies £3,000 of pastries to a local café on net-30 payment terms.

On delivery (May 1):

• Debit: Accounts Receivable £3,000
• Credit: Sales Revenue £3,000

On payment (May 28):

• Debit: Cash £3,000
• Credit: Accounts Receivable £3,000

This reflects a typical AR scenario in a business where invoices are delivered on credit and payment is received within the agreed timeframe. It allows an organization to maintain a steady cash flow.

Key Differences Between Accounts Payable and Receivable

The discussion above clarifies how both AR and AP are essential for cash flow. However, the two have opposite roles. AP tracks what you owe to others, while AR tracks what others owe you. Now, let’s have a closer look at how they differ in terms of financial statements and daily business processes:

Differences in the Business Process

The workflow behind the two is different. Check out how:

Step	Accounts Payable (AP)	Accounts Receivable (AR)
Triggered by	Receiving goods/services from a supplier	Selling goods/services to a customer
Common terms	Net 30, Net 60 (you pay within X days)	Net 30, Net 60 (customer pays you)
Recorded as	A bill or supplier invoice	A sales invoice
Team involved	Finance/Accounts Payable	Finance/Accounts Receivable or Sales Billing
Goal	Pay vendors accurately and on time	Get paid by customers quickly and efficiently

Impact on Financial Statement

Both AP and AR appear on your company’s balance sheet, but in very different sections:

Category	Accounts Payable (AP)	Accounts Receivable (AR)
Appears on	Balance Sheet	Balance Sheet
Account Type	Current Liability	Current Asset
Represents	The money your business owes to others	Money that others owe your business
Effect on Cash Flow	Reduces cash when paid	Increases cash when collected

Handling these two business aspects better allows your business to pay its dues and receive payment in return. It also runs better operations and keeps cash flow at its optimal health.

How To Manage AR and AP Well?

Managing your accounts receivable and accounts payable isn’t just about keeping your books tidy. It’s key to keeping your business scale and hitting its milestones. When handled well, they help you avoid cash flow mishaps and stay on solid financial ground.

In here, we round up how to get it right:

Set Clear Payment Terms

Start by setting payment terms that work for both you and your customers.

• For AR: Make sure your terms are fair but firm, like net 30 or net 45, depending on your industry, customer type, and order size.
• For AP: Don’t be afraid to negotiate longer payment windows with suppliers (e.g. net 60 or 90) to hold onto your cash a little longer and improve your working capital.

Pro tip: Clear, upfront terms reduce confusion and help avoid delayed payments or late fees.

Generate Quick Invoices

Delays in invoicing = payment delays.

• Send invoices promptly after delivering a product or completing a service.
• Use professional templates to avoid missing key info like due dates or contact details.

Automate invoicing and reminders using tools like Xero, QuickBooks, or GoCardless. These save time and make it easier for customers to pay on time.

Remember: High AR might look good on paper, but your cash flow could take a dip if those invoices aren’t getting paid.

Pay Bills on Time

Just like you expect to get paid, your suppliers do too.

• Avoid late payments by tracking due dates and setting up auto reminders.
• Prevent penalties with timely payments and keep your vendor relationships strong.

Frequent payment delays can hurt your credibility and leave you less negotiation room in future deals.

Managing accounts receivable and payable isn’t only focusing on one over the other. Instead, you should strive to strike the right balance. Start by being proactive with invoices to speed up incoming payments, and consider investing in automated procedures. It can keep things clear, accurate, and keep cash moving.

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FAQs – Accounts Payable vs. Accounts Receivable

Here are the most popular questions:

What is the primary difference between accounts receivable and accounts payable?

Accounts payable are the money your business needs to pay suppliers, while accounts receivable are the money your customers owe you. AR is listed as a current asset because it's money coming in soon, and AP is a current liability since it’s money you’ll need to pay out soon.

What do AR and AP have in common?

For each transaction, an invoice is money owed by one business and money expected by another. Accounts payable and accounts receivable are both recorded in the company’s general ledger: AP as a liability and AR as an asset. Looking at both gives you a clear picture of the company’s financial health.

Should a business treat AP and AR separately?

Deciding if AP and AR should be handled separately depends on how big and complex your business is. It’s a good idea to have different people or teams manage each one if possible. This not only helps things run more smoothly but also reduces the chance of errors or fraud.

Since the tasks and skills involved in handling incoming and outgoing payments are quite different, separating them adds an extra layer of control. It makes sure no one person has full access to all your business’s money movements.

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Sources used: N/A