Question

What is the difference between accounts receivable and accounts payable?

Answer 1

Short answer
- Accounts receivable (AR) = money others owe your business for goods or services you’ve already delivered on credit. It’s an asset.
- Accounts payable (AP) = money your business owes to suppliers or vendors for goods or services you’ve received on credit. It’s a liability.

Key differences
- Perspective: AR is from the seller’s point of view; AP is from the buyer’s point of view.
- Balance-sheet classification: AR appears under current assets; AP appears under current liabilities.
- Normal balance: AR has a normal debit balance; AP has a normal credit balance.
- Timing/recognition: AR arises when you record revenue before receiving cash; AP arises when you record an expense or purchase before paying cash.
- Cash-flow impact: Collecting AR increases cash; paying AP decreases cash.
- Management focus: Businesses try to collect AR quickly (reduce DSO) and delay AP when possible (increase DPO) to improve working capital.

Simple example
- You sell $1,000 of goods on 30‑day credit → you record $1,000 AR (asset) and revenue. When the customer pays, AR decreases and cash increases.
- You buy $500 of supplies on 30‑day credit → you record $500 AP (liability) and an expense or inventory. When you pay the supplier, AP decreases and cash decreases.

That’s the core difference.