Accounts Payable vs Accounts ReceivableDifferences You Need to Know Between the Two!

Denise Elizabeth P
Senior Financial Editor & Contributor

A company’s balance sheet, without the Accounts Receivable and Accounts Payable, is almost incomplete.

Each represents a crucial role in the operations of the business in terms of revenues and expenses and helps businesses analyze the income generating potential of the business and its capacity to grow and expand.  

Accounts Payable – or purchases on credit – are listed in the Balance Sheet as a short-term liability.

They are typically paid for by the company within the accounting cycle.

On the other hand, Accounts Receivable – or sales on credit – are listed as a current asset and are expected to be received within the year.  

When Accounts Receivable and Accounts Payable are not managed properly, it can affect not just the credit standing of companies, but also their stability. 

What is Accounts Payable (AP)?

Accrual Accounting

Accounts Payable refers to purchases on credit from suppliers and could also refer to money owed to creditors.

They are usually short-term and can be paid within the accounting cycle of the company.

Items such as wages payable or long-term debts do not fall under Accounts Payable. 

When a company receives an invoice from their supplier, it is automatically recorded in the books according to the terms agreed upon.

For terms on credit, the purchase of the items are recorded under the supplier’s account as a credit to Accounts Payable and debited for the corresponding expense account.

When it is paid, the accounts payable account is debited and its balance decreases. 

For companies that have a high volume of purchases, they usually have an AP team that oversees the entire supplier relationship and ensures that the company receives a favorable agreement.

They also ensure that each vendor account is updated accurately and all due invoices are paid on time. 

Accounts Payable Example

ABC Bakery orders flour from their supplier worth $7,500 payable within 15 days.

When ABC receives the invoice from Flour Inc. (their Supplier), their AP team will enter this journal entry:

How to Record Accounts Payable

Accrual Method

Accrual Method of accounting records expenses when incurred regardless of when the payment is made.

Suppose in the example above, ABC Bakery decides to pay 50% upon receipt of their flour purchase, and the remaining 50% after 15 days.

In their books, the journal entry will look like this:


Regardless of how much was paid, the expense for the full amount is recorded in the books.

After 15 days, when ABC Bakery pays the full amount, the entry to record the payment shall be as follows:

Cash Basis Method

Under the Cash Basis Method, expenses are recorded when cash is paid.

If ABC Company pays an advance payment of 50% when it places the order, the journal entry will be to debit the expense of $3,750 and a credit to Cash. 

When the item ordered has been received and they pay the balance, they will post the same entry, which is to debit the expense and credit cash. 

Days Payable Outstanding

Days Payable Outstanding (DPO) is an analysis used by companies to measure the effectiveness of how the payables and supplier relationships are effectively managed.

To compute for the DPO, the formula used is:

DPO = Average Accounts Payable / Cost of Goods Sold x Number of Days in the Accounting Period


Average Accounts Payable = (Accounts Payable Balance at Beginning of Period – Ending Accounts Payable Balance) / 2

What is Accounts Receivable (AR)?

Accounts Receivable is the amount of products or services that a company delivers on credit.

It is reflected in the Balance Sheet under current assets and includes all of the sales made on credit to all customers or clients. 

As an accounting rule, when services are rendered and products are delivered, revenue is recognized regardless of the receipt of payment.

When invoices are sent by companies to their customers, there usually are pre-agreed terms of payment.

However, for customers with large amounts of orders, a down payment is usually asked for. 


Biz Technologies – a software company – has hired CPA Inc. to conduct their year end closing for the year 2021.

As per their agreement, Biz Technologies will pay CPA Inc. $15,000 with the terms: 50% advance and 50% upon completion of the services. 

In the books of CPA Inc., they will record revenue for the full amount $15,000 and debit Accounts Receivable for the same amount. 

How to Record Accounts Receivable

Under the Accrual Method of accounting, when a product or service is delivered, it will be recorded as a revenue whether a payment is already received or not.

It shall be recorded under Current Assets in the Balance Sheet. 

Accounts Receivable Ratios

There are different ratios used by companies in the analysis of Accounts Receivable: such as the Accounts Receivable Turnover Ratio, Current Ratio and Days Sales Outstanding (DSO). 

Accounts Receivable Turnover Ratio

This is the ratio used by companies to determine the efficiency of how quickly the receivable are converted to cash within a given period.

The formula of AR Turnover Ratio is:

Accounts Receivable Turnover Ratio = Net Annual Credit Sales / Average Accounts Receivables

Current Ratio

The Current Ratio is a measure of liquidity, or the ability of a company to pay short-term obligations from converting the current assets of a company to cash. 

The formula to compute for the Current Ratio is dividing the Current Assets by the Current Liabilities.

Current Ratio = Current Assets / Current Liabilities

Days Sales Outstanding (DSO)

To measure how long before a company pays for their outstanding bill, the DSO is the metric used. 

DSO = (Accounts Receivable for a Given Period / Total Credit Sales) x Number of Days in the Period

What Do Accounts Payable and Accounts Receivable Have in Common?

accounts receivable factoring

Both the Accounts Receivable and Accounts Payable are shown in the Balance Sheet of the company.

Accounts Receivable is reported under current assets while Accounts Payable are recorded under current liabilities. 

When investors look at a company, the Accounts Payable and Accounts Receivable are essential accounts in order for them to determine whether the business is able to manage their cash flow, follow important accounting practices, and maximize their working capital. 

Accounts Payable vs Accounts Receivable: Key Differences

From a reporting perspective, Accounts Receivable is an Asset Account while Accounts Payable is a Liability Account.

From an internal control perspective, the team managing Accounts Payable should be different from those who are responsible for Accounts Receivable – the person entering the bills should not be the same person recording invoices. 

Other key differences:

Accounts Receivable Accounts Payable
  • To be received from customers
  • To be paid to Suppliers / Vendors
  • Supplier’s Record
  • Customer’s Record
  • Recognized as an income
  • Recognized as a liability

What is the Relationship Between Accounts Payable and Accounts Receivable?

The Accounts Receivable and Accounts Payable of the business are important factors in determining a healthy cash flow.

Essentially, they are what is owed by customers and what is owed to vendors.

With this information present, it helps companies and investors understand how financially strong the business is and can in turn, help businesses come up with better practices to improve their cash flow. 

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  1. Southern Utah University "Balance Sheet Ratios" Page 1 - 2. February 1, 2022

  2. Cornell Law School "Accounts Payable" Page 1 . February 1, 2022

  3. Cornell Law School "Accrual Method of Accounting" Page 1 . February 1, 2022

  4. Texas A&M University "Financial Management: Cash vs Accrual Accounting" Page 1 . February 1, 2022