What’s the Difference Between Accounts Payable and Accounts Receivable?

Accounting has many components, with Accounts Receivable (AR) and Accounts Payable (AP) being two of the most important. If not managed properly, they can have massive impacts on your operations. Most businesses have robust accounting and accounts receivable software to help them keep track of these transactions.

You use accounts payable and accounts receivable to account for the purchases of goods and services. They can also track the amount of money owed or received from customers. They both fit into the accounting equation. Assets = liabilities + equity – which you can find reflected on the balance sheet.

You will find the snapshot of your company finances with the financial statements. Accurate account management of AR and AP transactions helps business managers project revenue and spending strategies.

Accounts payable is a liability

Accounts payable is a business liability payable to suppliers and other creditors for goods and services provided by them. Unlike AR, AP transactions take money from the available cash flow of your business. 

How to record accounts payable transactions

You should record accounts payable transactions as debits (increases) in the AP sub-accounts and the equity account for the same amount. Once you have paid an AP transaction, both the AP and equity accounts will be credited (decreased), and there will be a credit in the cash account for the same amount.

Accounts receivable is an asset

You will recognize AR transactions as outgoing invoices and incoming payments from customers. These transactions are instrumental in ensuring you report accurate revenues. Ultimately the AR account supports increases in the cash flow of your business.

How to record accounts receivable transactions

Report accounts receivables as assets on the balance sheet. The typical sub-accounts listed as accounts receivable are customer invoices and credits. Like AP, AR transactions will eventually affect your cash account. A debit occurs to the AR account as an asset on the balance sheet, and credit happens in the revenue asset account on the balance sheet.

The second part of the AR transaction recording is when your customer has paid their invoice. When this occurs, and you have recorded the payment, the AR account is then credited, the cash account gets a debit, and the owner’s equity account will increase by the same amount.

Accounts receivable have a more significant impact on growth

Your revenue and your AR are directly connected. Invoices come from profits earned from credit sales to customers. Paid invoices create cash flow so a business can carry out expenditures. Although AP similarly impacts cash flow in the opposite direction, most AP transactions are from spending. Without paid invoices, a company can become cash-strapped and unable to meet its AP requirements.

Keep your AR and AP transactions up to date

It’s best to manage AR records with accounts receivable software. Accounting can seem overwhelming to even an experienced business owner, but the basics are not hard to master. AR and AP are the first transactions you will record when managing your business. It is vital always to keep them accurate and reported on time.