Difference Between Accounts Payable and Accounts Receivable

Q:

What is the difference between accounts payable and accounts receivable?

A:

Accounting students or individuals first learning accounting on their own commonly get tripped up by the difference between accounts payable and accounts receivable. Hopefully the information below can clear up the difference between the two accounts. Let’s dig into the topic.

Accounts Payable

Accounts payable is the amount owed by a business for goods or services. For example, assume a company named Tee Fashions orders and receives a shipment of t-shirts from a supplier for $10,000.  The supplier allows Tee Fashions 30 days to make the full payment for the t-shirts. Tee Fashions has not paid the $10,000 to the supplier, but intends to make the payment within 30 days.

The $10,000 owed to the supplier is considered an account payable. It is also a current liability that appears on the balance sheet. It is a current liability because the amount owned is typically due with at least 60 days.

The normal balance of accounts payable is the credit balance. This means that accounts payable increases with a credit and decreases with a debit.  Tee Fashions, from the example above, would record the following journal entry for the $10,000 owed to the supplier.

AccountDebitCredit
Merchandise Inventory (T-Shirts)10,000
Accounts Payable10,000

Now assume that Tee Fashions pays the supplier the $10,000 a few days after the shipment was received. The journal entry would appear as follows. Notice that the accounts payable is now a debit since it is being decreased from the cash payment of $10,000.

AccountDebitCredit
Accounts Payable10,000
Cash10,000

Accounts Receivable

Accounts receivable is the amount that is due to be paid to a business. For example, assume that company called ABC Butter sends a shipment of butter to a grocery store and gives the grocery store 30 days to pay $10,000 for the butter.

ABC Butter would consider the $10,000 due to them as an accounts receivable because they are waiting to receive the payment. Accounts receivable is a current asset because the amount will likely be paid within a short period.

The normal balance of accounts receivable is the debit balance. This means that accounts receivable increases with a debit and decreases with a credit.  ABC Butter, from the example above, would record the following journal entry for the $10,000 amount owned to them.

AccountDebitCredit
Account Receivable10,000
Sales Revenue10,000

When the $10,000 payment is made by the grocery store to ABC Butter, the following journal entry will apply:

AccountDebitCredit
Cash10,000
Account Receivable10,000