What Is the Difference Between Accounts Payable and Accounts Receivable?
A working knowledge of both accounts payable and accounts receivable is necessary for managing your business finances.
Accounts Payable, or AP, represents the amount of money that a business owes vendors, suppliers, and other creditors. Accounts payable is always a liability account and should have a credit balance since it represents money that will be leaving the business.
For example, ABC Printing purchased $1,500 worth of office supplies. The journal entry to record the invoice would be as follows:
Date | Account | Debit | Credit |
---|
7-15-2023 | Office Supplies | $1,500 | Â |
7-15-2023 | Accounts Payable | Â | $1,500 |
Because office supplies are an expense account, we debit it, increasing its balance.
We then credit the accounts payable account, because it’s a liability account, and a credit entry increases the balance.
When we pay the invoice, we would complete the following journal entry:
Date | Account | Debit | Credit |
---|
7-31-2023 | Accounts Payable | $1,500 | Â |
7-31-2023 | Checking Account | Â | $1,500 |
We credit accounts payable when we pay the invoice because we want to reduce the AP account balance since the invoice is being paid.
We’re also reducing the checking account balance when we pay the bill since we’re reducing the balance of the checking account, which is an asset account.
Accounts receivable or AR represents the money that is owed to your business from your customers.
The AR account is always an asset account and should have a debit balance because it represents something of value that your business owns.
For example, ABC Printing sold $1,700 worth of printing services to their customer. To record the sale, you would complete the following journal entry:
Date | Account | Debit | Credit |
---|
7-10-2023 | Accounts Receivable | $1,700 | Â |
7-10-2023 | Sales-Printing | Â | $1,700 |
Because we want to increase the AR account balance, we debit it, since accounts receivable is an asset account.
We then credit the sales account, because the sales account is a revenue account, which is increased by posting a credit.
When our customer pays the invoice, we’ll complete the following entry:
Date | Account | Debit | Credit |
---|
7-25-2023 | Checking Account | $1,700 | Â |
7-25-2023 | Accounts Receivable | Â | $1,700 |
We also need to credit the accounts receivable account once the customer has paid, reducing the accounts receivable balance.