The difference between accounts receivable and accounts payable
/What is Accounts Receivable?
Accounts receivable are the amounts owed to a company by its customers. Receivables are only created when sales are made on credit. These amounts are essentially an unsecured line of credit that is being extended to customers.
What is Accounts Payable?
Accounts payable are the amounts that a company owes to its suppliers. Payables are only created when purchases are made on credit. Accounts payable may be divided into trade payables and other payables, where trade payables are obligations owed to suppliers in the normal course of business, while other payables are all other types of payables (such as amounts owed to employees).
Comparing Accounts Receivable and Accounts Payable
The amounts of accounts receivable and payable are routinely compared as part of a liquidity analysis, to see if there are enough funds coming in from receivables to pay for the outstanding payables. This comparison is most commonly made with the current ratio, though the quick ratio may also be used. Other differences between accounts receivable and payable are as follows:
Receivables are classified as a current asset, while payables are classified as a current liability. This is not the case when receivables or payables are not to be received or paid within one year, in which case they are classified as long-term assets or liabilities, respectively.
Receivables may be offset by an allowance for doubtful accounts, while payables have no such offset. In the latter case, it is expected that the organization will have to settle 100% of its payables obligations.
Receivables usually only involve a single trade receivables account and a non-trade receivables account, while payables can be comprised of many more accounts, including trade payables, sales taxes payable, income taxes payable, and interest payable.
Many payables are required in order to create products for sale, which may then result in receivables. For example, a distributor may buy a washing machine from a manufacturer, which creates an account payable to the manufacturer. The distributor then sells the washing machine to a customer on credit, which results in an account receivable from the customer. Thus, payables are typically required in order to produce receivables.