Accounts receivable are the amounts owed to a company by its customers, while accounts payable are the amounts that a company owes to its suppliers. 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.
Accounts Receivable means the money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year.
Accounts Payable is an accounting entry that represents an entity’s obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities.
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.
- Receivables may be offset by an allowance for doubtful accounts, while payables have no such offset.
- 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.