Do you remember that awkward conversation with your bookkeeper? Yeah, you know the one. They asked you about your accounts receivable and you confidently launched into a rundown of the business expenses you’d recorded for the past month and details of your regular supplier invoices – yup, your accounts payable.
For those of us who live and breathe our business but don’t live and breathe finance, mixing up accounts payable and accounts receivable is easy. It doesn’t have to be hard though. Read on for definitions of accounts payable vs accounts receivable and feel comfortable next time your accountant is knocking at the door.
Accounts receivable meaning
So, what is accounts receivable (AR)? Your accounts receivable is quite simply the money owed to your company by debtors. It’s a current asset on your books. Take all the invoices you’ve sent out for the goods or services you’ve already provided but haven’t collected payment for yet. The total amount owing to you – that’s your accounts receivable.
Accounts receivable is required if your company is selling goods or services to customers by extending credit to them (you allow them to purchase without paying upfront), with the expectation they’ll pay by an agreed due date. This is a common and important business strategy to increase sales volumes but does mean you have accounts receivables to manage. Management of your accounts receivables is commonly known as credit control.
Accounts receivable example
As an example of accounts receivable, let’s pretend we run a company called Doggone Goods. We sell anything and everything a dog could ever want. We supply to the public and to retail. You have several retailers that place monthly orders for stock which you supply on credit. You then invoice them as per your agreed payment terms every month (this could be payment within seven days of receipt of invoice, 30 days or sometimes even 60 days depending on your relationship with customer). The amount owing to you by them, is your accounts receivable.
Accounts payable meaning
Given you now understand the meaning of accounts receivable, you’ve likely got an inkling as to what is an account payable (AP). Accounts payable covers current liability you have on your books to pay. It’s the short-term debt that you’re liable to pay for invoices from suppliers and creditors. The accounts payable line on a company’s balance sheet will show the total amount they owe to suppliers and creditors. It won’t list out individual expenses and once an expense has been marked as paid by the AP team, it will come off the balance sheet.
Accounts payable doesn’t include long-term debt (like a mortgage) or payroll for staff wages.
Accounts payable example
Some examples of accounts payable are office furniture, software subscriptions, marketing and advertising services and office cleaning services. Employee wages do not fall into accounts payable.
Common factors between accounts receivable and accounts payable
The common denominator between the two terms is that both accounts receivable and accounts payable are accounting terms. They both relate to money owed that appears on your balance sheet – the difference is that one (accounts receivable) talks to the money owed to you, whereas the other (accounts payable) covers the money you are liable to pay.
Another commonality between the two is the advances technology in the sector has made over the past few years. Previously, business owners, bookkeepers, accountants and finance teams would be bogged down in multiple spreadsheets, juggling records across different systems and struggling to keep up with the amount of repetitive, manual work involved. These days both AP and AR are served well by software systems that specialise in the automation of repetitive, manual tasks and integrate across multiple accounting software. These software systems can save whoever is responsible for AR or AP in your business hours each week, they ensure consistent communication with customers and ultimately help you get paid faster and have healthier cashflow.
Why are good accounts receivable and accounts payable important?
Both accounts receivable and accounts payable have a direct impact on your cashflow and essentially, they both stem from an invoice. One you’re liable for, the other you are waiting to receive payment.
As with most things finance, when your AR and AP are managed well you are more likely to have strong, healthy cashflow. If you’re managing your accounts receivable well, you’ll be staying on top of debtors and ensuring you have a lower volume of overdue invoices or late-paying customers. The result of this will be positive cashflow.
If you’re managing your accounts payable well, you’ll be taking advantage of any discounts available for prompt payment and making sure that reporting is regular so you’ve got clear visibility on the impact your payables will have on your cashflow.
Any investors involved in your company or if you’re looking to sell your business, well-managed and clearly reported accounts receivable and accounts payable will be an important factor in determining the value and general saleability of your business.
Commonly asked questions about accounts receivable vs accounts payable
Here’s our quickfire answers to the most frequently asked AR vs AP questions:
- Accounts receivable is money owed to your company.
- Accounts receivable is an asset on your balance sheet.
- Your company is accountable for your accounts payable.
- Accounts payable is a liability on your balance sheet.
- Accounts receivable results in cash inflow.
- Accounts payable results in cash outflow.
- Accounts payable doesn’t include employee wages.
Accounts receivable not your thing?
Come to the realisation that accounts receivable, or maybe accounts full stop, is not your thing? Have a chat to one of our friendly team to learn more about the credit management tools we offer. From automating your customer onboarding and accounts receivable process to risk assessment and credit reporting, we support thousands of small businesses to take control of their finances. Get back to what you’re passionate about, save time and get paid faster.
|Money owed to your company
|Money you owe to another company
|Is an asset for your company
|Is a liability for your company
|Impacts your cash flow
|Disclosed on your balance sheet
|Accountability sits with your company
Get started with CreditorWatch today
Take your credit management to the next level with a 14-day free trial.