What is the difference in Accounts Payable and Accounts Receivable

What is the difference in Accounts Payable and Accounts Receivable

In order for a business to grow, take on new opportunities, and maintain positive relationships with its customers and suppliers, there needs to be an equal balance between accounts receivable (AR) and accounts payable (AP). If a business wishes to take this a step further, it can look into automating these processes by using AP Automation software.

In short, the accounts payable ledger of a business lists all of its short-term liabilities, such as money owed to creditors or suppliers. On the opposite end of the spectrum are accounts receivable, which are the funds that a business is expecting to receive from its partners and customers, making them assets.

In this guide, we’re going to walk through the differences and similarities between accounts payable (AP) and accounts receivable (AR) and compare and contrast them in detail.

What is Accounts Payable (AP)?

The accounts payable (AP) ledger of a business lists all of the funds it owes to creditors or suppliers. These can be payments for items purchased, services purchased, or various business expenses that have been invoiced.

AP doesn’t include all expenses, however, with long-term debt like a company’s office building mortgage or payroll not being included in the AP ledger.

When a business gets an invoice that lists the agreed-upon payment terms, that’s typically when accounts payable are recorded. Every time the company’s finance team receives a bill for goods and services, they record it into their general ledger as an expense.

To see the total amount of accounts payable within a business, all it takes is a quick look at its balance sheet, which summarizes total amounts and does not list individual transactions.

AP departments are the ones responsible for processing all of the invoices and expense reports of a business and ensuring that all payments are made on time. Many businesses today are beginning to use AP automation software to improve their efficiency, reduce errors, and save significant time.

What is Accounts Receivable (AR)?

While accounts payable tracks all of the outgoing funds that a business must pay for goods and services, accounts receivable (AR) tracks the funds customers owe a business for its own products or services. In short, AR tracks all of the money coming into the business.

Just like with AP, a balance sheet will be able to show a summary of all AR within a business, including all of the invoices that clients still owe for any services rendered or work performed.

Typically, your business would bill your customers after selling them products or providing them with various services according to terms that are mutually agreed upon by both parties. For large orders, a business may ask for a larger deposit upfront to secure the transaction, especially if the product being sold is a “custom order” and can’t easily be returned or taken back.

Once the client pays your business, then the payment is recorded and the account is no longer considered “receivable.” As technology continues to advance, many businesses are starting to transition into using automation for their accounts payable and accounts receivable workflows, simplifying the process and improving efficiency.

Similarities between AP & AR

When looking at individual transactions, every single invoice is either receivable or payable to one party on either end of the transaction. What one company records as AR the other records as AP, and vice versa, so they are both linked to one another directly.

In order to gain a good understanding of a company’s financial health, both its liabilities in terms of AP and its assets in terms of AR must be looked at in full.

Since AP and AR are so closely related, and whether an invoice is an asset or liability depends on which side of the transaction your business is on, it is important for finance leaders to examine both receivables and payables carefully, and determine what can be optimized and improved upon.

By using AP Automation software, your business can simplify, streamline, and reduce errors throughout your accounts payable and receivable workflows, making it easier on your employees and improving their overall productivity.

Learn more about how you can use AP automation in your company in order to improve your workflows and save on expenses by exploring Rossum.ai and our industry-leading automation software solutions.