Accounting terms are fairly confusing with their almost similar-sounding names and combinations. One among them is the accounts payables and accounts receivables. As literal as it sounds, it means an amount of money to be paid and received respectively. Although, a slight mistake can create an imbalance in the accounting equation. So, it is important to be aware of the difference between the two significant accounting factors, accounts payables and accounts receivables.
Accounts payable is the amount of money a company need to pay on credit to its suppliers or creditors for the purchase of goods or services in a short period of time. It is shown as liability in the company’s balance sheet. Stock, services or utilities may be considered as Accounts payable.
Accounts payable comes under current liabilities as it is not paid in advance to the creditors rather it is recorded as a credit. Accounts payable is an important element to manage company’s performance. If AP is high, it means that the company has been purchasing in credit excessively instead of payment as cash. If AP is low, then the company is paying more money upfront for the goods or service they use. The accounts payable balances the company’s cash inflow.
Accounts receivable is the amount of money owed to a company by its customers on credit in return for the goods or services received by them. The amount to be received is recorded in the company’s general ledger as current assets. The money is usually collected in a year or less from the debtor. As it is a current asset, the accounts receivables measure the company’s liquidity and ability to conduct short-term covenants with seamless cash flow.