What is the difference between accounts payable and accounts receivable?

The distinction between accounts payable and accounts receivable is fundamental to understanding a company's financial obligations and rights. Accounts payable refers to the amounts a company owes to its suppliers or creditors for goods and services that have been purchased on credit. This represents a liability for the company, as it indicates money that must be paid in the future.

In contrast, accounts receivable represents the amounts owed to a company by its customers for goods and services that have been delivered but not yet paid for. This signifies an asset for the company, indicating future cash inflow as the customers settle their outstanding debts.

Understanding these definitions is crucial for effectively managing a company’s cash flow and financial position. This differentiation helps businesses monitor their obligations to pay others while simultaneously keeping track of money that is expected to come in from customers. In summary, one is related to what a company owes (accounts payable), and the other pertains to what is owed to the company (accounts receivable).