Accounts Receivable Versus Payable: Differences and Examples

April 23, 2024
business owner doing accounts payable and receivable

Accounts receivable and accounts payable are distinct categories of business finance. One deals with funds flowing out of a business, while the other describes funds flowing in. But they work together to create balance. 

As a business owner or freelancer, knowing how to organize your accounts can help you navigate your finances with confidence. Here’s a guide to accounts receivable versus accounts payable. Find examples, common transactions, and how to record them. 

What Is Accounts Payable?

When a company buys goods or services on credit, it doesn’t make a payment right away. Instead, it receives an invoice from the supplier that says when the payment is due.

These invoices fall under accounts payable, sometimes called AP. They represent the money the company owes. These debts are short-term liabilities, meaning they must be paid soon. And until the company pays, the amount is still in accounts payable on the balance sheet. This makes it easier to track bills and pay on time.

RELATED ARTICLE Invoicing Tips: Can You Write off Unpaid Invoices?

How To Record Accounts Payable

To record accounts payable, track the goods or services you buy on credit. Then, document the amounts you owe suppliers and vendors.

In practice, this process often includes:

  1. Ordering goods or services from a provider
  2. Accepting the goods or services 
  3. Receiving an invoice from the provider
  4. Logging it as accounts payable in the company accounting system
  5. Marking it as paid after paying for it

Examples of Accounts Payable

accounts payable illustration

Imagine a small business owner, Emily, who operates a bakery. She orders ingredients like flour and sugar from a local supplier. The supplier delivers the goods. Then, the supplier bills Emily for the cost.

Emily now has an accounts payable entry, representing the amount she owes to the supplier. Until she pays, the amount stays an account payable on her financial records.

Here are a few more items that could be accounts payable:

  • Utility bills
  • Rent
  • Employee salaries and wages
  • Taxes
  • Loan repayments
  • Equipment maintenance
  • Professional fees
  • Advertising and marketing expenses

What Is Accounts Receivable?

Accounts receivable, also known as AR, represent sales earned but not yet paid for. It could also be money you expect to receive but haven’t yet, like from interest on late payments.

Let’s say a company sells a good or service to a customer but doesn’t receive payment right away. The company records this as an account receivable. 

Usually, the business specifies a specific time frame for payment. This time frame is called the credit period.

How To Record Accounts Receivable

To record accounts payable, track the goods and services you sell on credit. Then, create invoices or sales receipts to document the amounts. Specify a time frame for payment so you and the customer are on the same page.

This process usually involves:

  1. Selling a good or service to a customer
  2. Delivering the good or service 
  3. Giving the customer an invoice
  4. Logging the invoice as an account receivable in the company accounting system
  5. Marking it as paid once the customer pays

This entry represents money you’ll receive soon. That means you can list it as an asset on your balance sheet.

RELATED ARTICLE — What Is a Proforma/Pro Forma Invoice?

Examples of Accounts Receivable

accounts receivable illustration

Suppose a landscaping company mows a customer’s lawn but lets them pay for the service later. The amount owed by the customer becomes an accounts receivable for the landscaping company.

The same goes for a graphic design firm that creates projects for clients. It agrees to a project and then sends an invoice. The client’s debt is an account receivable until payment.

Here are other common examples of accounts receivable:

  • Rental income
  • Income from fees
  • Interest income
  • Installment or loan income 
  • Membership dues
  • Licensing fees
  • Insurance claims

What Is Accounts Receivable Versus Payable? Key Differences

Still not clear on the differences between accounts payable and accounts receivable? Here’s a handy chart:

AspectAccounts PayableAccounts Receivable 
DefinitionThe money the business owesThe money customers owe the business
CausesPurchasing goods or services on creditSelling goods or services on credit
Impact on Cash FlowReduces cash flowIncreases cash flow
ManagementBusiness owes moneyBusiness is owed money

Accounts receivable tracks money coming in. Accounts payable tracks money going out. Their main similarity is that they record the agreements behind transactions, not the money itself.

8 Tips for Improving Your Accounts Receivable and Payable Process Fast

business owners with laptop and tablet doing accounting

Here are some practical tips for tracking accounts payable and receivable:

1. Begin as Early as Possible

Track accounts receivable and payable from the moment you start a transaction. Updating records in real time prevents errors. It also helps you or the other party remember to pay. 

RELATED LINK — Accrual Basis Accounting: Definition and How It Works

2. Create Detailed Customer Profiles

Include accurate contact info, payment terms, and sales history. Update these records often for better communication and billing.

3. Create an Effective Credit Approval Process

Create a clear credit approval process. Don’t give credit to clients who haven’t paid in the past. This lowers the risk of late payments or defaults and helps you make sure customers are creditworthy.

4. Automate Your Invoices

Invest in invoice tracking software like Invoice Simple. It has automation features that reduce errors and save time. You can save repeat invoices, track expenses, and create branded bills.

RELATED ARTICLE — 10 Common Invoicing Mistakes and How To Avoid Them

5. Simplify Cash Application 

Develop a standard process for applying cash to invoices. This makes sure all accounts are accurate. It also helps track who’s paid and when.

6. Give Customers More Payment Options

Make it easy for customers to pay. Allow credit cards, bank transfers, and digital wallet payments. This helps you meet different customer preferences. It also speeds up payments.

7. Create Clear Policies for Late Payments

Include follow-up protocols for overdue invoices. Send reminders to customers with overdue balances. Escalate to collections when needed.

8. Conduct Regular Reconciliation

Double-check your accounts receivable and accounts payable. Compare them to bank and vendor statements. This helps you spot and fix any discrepancies quickly.

Invoice Templates Customized To Your Business

Clean invoices support accounts receivable. If you want to stay on brand and look professional, use Invoice Simple. Find fully brandable estimate and invoice templates for every kind of business. Just add your logo. 

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