Accounts receivable vs. accounts payable: 5 differences
Keeping your business in motion means there’s cash coming in and cash going out, and it’s important to maintain balance to make sure your business continues running smoothly. Two financial terms you’ll want to become familiar with are “accounts receivable” and “accounts payable”—two sides of the same coin and both integral to a healthy business.
Accounts payable is the money your company owes to its vendors, suppliers or creditors. On the other hand, accounts receivable is the money your company expects to get back for the goods or services you’ve provided.
Keep reading to learn more about the differences between these two financial functions.
What you’ll learn:
- Accounts receivable refers to money coming in, while accounts payable refers to money going out.
- There are five key differences between the two—from when they happen and how they show up on your balance sheet to the role they play in your day-to-day decisions.
- Keeping these functions balanced is key to running a stable business. An accounts payable tool, like the one from Capital One, can make it easier to manage payments and keep operations running smoothly.
What are accounts receivable?
In business, accounts receivable is more than just a line item—it represents the value of work you’ve already delivered but haven’t been paid for yet. And until those payments come in, they show up as an asset on your business’s balance sheet.
For example, if a marketing agency completes a project for a client and invoices them $10,000 with a 30-day payment term, then until the client pays, the agency records this amount as accounts receivable under assets.
| Assets | Liabilities & equity |
| Cash: $40,000 | Accounts payable: $15,000 |
| Accounts receivable (client invoice): $10,000 | Loan payable: $50,000 |
| Equipment: $70,000 | Owner’s equity: $55,000 |
| Total assets: $120,000 | Total liabilities & equity: $120,000 |
Accounts receivable isn’t just about the money—it’s also about the team, tools and processes that help you collect it. This function keeps track of outstanding payments and ensures everything stays on track. When those processes aren’t running smoothly, it can lead to cash flow challenges, more bad debt and other financial risks.
What are accounts payable?
If accounts receivable is the money a business is owed, then accounts payable is the money it owes to vendors, suppliers or creditors for goods or services received on credit.
Consider the marketing agency again. They recently purchased new design software and office supplies from a vendor on credit, receiving an invoice for $8,000 with a net 30 payment term. Until they pay it off, the agency lists this amount as accounts payable under liabilities.
| Assets | Liabilities & equity |
| Cash: $40,000 | Accounts payable (vendor invoice): $8,000 |
| Accounts receivable (client invoice): $10,000 | Loan payable: $50,000 |
| Equipment: $70,000 | Owner’s equity: $62,000 |
| Total assets: $120,000 | Total liabilities & equity: $120,000 |
Just like accounts receivable, accounts payable often involves a team and systems that make sure payments go out on time. Your accounts payable function handles outstanding debts and ensures vendors and suppliers get paid accurately and on schedule. When those processes break down, it can lead to late payments, strained supplier relationships and unnecessary financial penalties.
How are accounts receivable and payable different?
Receivables are the money people owe you, while payables are what you owe to others. The key differences below highlight how each function affects your operations and helps you make smarter decisions.
Timing: Inflow vs. outflow
With a continuous stream of incoming cash (inflow) and outgoing cash (outflow), timing is key. Ideally, you’ll want to collect the money you’re owed quickly so you can pay off the expenses you owe without disruption. Like accounts receivable, payment deadlines for accounts payable can vary depending on the terms with suppliers. Properly coordinating both of these functions to balance your inflow and outflow keeps your business financially stable and running smoothly.
Financial statements: Assets vs. liabilities
Accounts receivable are assets that contribute to a company’s overall value. Having higher receivables can make a business look more financially stable. But if there are too many unpaid invoices, it could point to collection problems or cash flow challenges.
On the other hand, accounts payable are liabilities since they represent money the business still owes. A high accounts payable balance can indicate smart credit use, helping the company hold onto cash for operations. But if those liabilities get too high, it could raise red flags about the business’s ability to pay its bills.
Business management: Short- vs. long-term obligations
Accounts receivable are short-term assets, and getting paid quickly is key for keeping cash flow steady and ensuring there’s enough cash on hand to manage day-to-day business expenses.
On the flip side, accounts payable are typically short-term liabilities and most businesses aim to pay their bills within 30 to 60 days. By negotiating better credit terms, businesses can extend their payment periods, which helps improve working capital and the ability to invest in growth opportunities.
Balancing short-term and long-term obligations helps keep your business from running into cash flow problems, reduces financial risks and creates space for growth or investment.
Credit terms: Revenue vs. expenses
Accounts receivable determine the credit terms given to customers and show when the business expects to get paid for the goods or services provided, which directly impacts its revenue. These terms can vary, such as net 30, net 60 or net 90, and set the timeline for when payments are due.
Accounts payable, however, are tied to the credit terms set by suppliers, which determine when the business needs to pay for the goods or services it buys. These terms help manage cash outflows since the payments are considered expenses. The longer the payment terms are, the more flexibility the business has in managing cash flow and planning for future expenses.
Risk: Collections vs. payment deadlines
With both accounts receivable and accounts payable, there are risks to prepare for. When managing your inflow, the biggest risk is customers not paying on time or not paying at all. This can be very disruptive to your cash flow and impact your planned expenses. Managing this risk can mean proactively following up on overdue charges from customers.
On the other hand, the biggest risk with accounts payable is missing payment deadlines. Not only could this cost you more money through penalties or interest charges, but it can also strain relationships with your suppliers.
Businesses can adjust their payment cycles to stretch out accounts payable and improve their accounts receivable processes, reducing the need for credit or emergency funding. This helps with better financial management and smoother day-to-day operations.
Key takeaways
In short, accounts receivable is your incoming cash and accounts payable is your outgoing cash. When managed properly, they help a business keep cash flow in check and make smart decisions about growth. But if they get out of balance, it can lead to big risks, like cash flow disruptions or strained relationships with suppliers.
The Accounts Payable tool from Capital One helps business owners avoid these issues by simplifying the accounts payable process, ensuring payments are made on time and keeping operations running smoothly.
Ready to take control of your business finances? Get pre-approved for a Capital One business card today and unlock the tools to support your growth and streamline your cash flow management.
