When it comes to accounts payable vs. accounts receivable, it’s easy for anyone without expertise in accounting to get confused. Who’s paying whom? Who’s receiving what?
Don’t worry, you’re not the only one with questions! Here, we’ve outlined a few of the key differences between these two terms and the departments they represent.
With this knowledge, non-accounting professionals at every level will be able to better understand corporate cash flow and relate to the people who handle the money at their companies.
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Accounts payable vs. accounts receivable: What’s the difference?
The difference between accounts payable and accounts receivable is deceptively simple but easily overlooked.
Accounts payable is a company’s liability account. People who work in accounts payable handle bills and invoices from third parties such as banks or vendors. In other words, accounts payable deals with money the company must pay to others.
Accounts receivable is the company’s asset account. Personnel in accounts receivable work with the money that third parties owe to the company, including customer bills. Put simply, accounts receivable deals with money the company expects to receive.
Accounts payable and accounts receivable ratio
Understanding the difference between accounts receivable and payable also helps you to understand a data point called the AR/AP ratio.
To calculate it, you divide the amount that your company bills to customers in a given month (accounts receivable) by the amount billed to you (accounts payable). The result will tell you how your business is doing.
- A ratio of 3:1 or greater indicates that you’re earning three times as much as you’re paying. It’s probably a good time for your company to think about growing or investing.
- A ratio of 2:1 is a good sign of a healthy business. Keep doing what you’re doing and save some money for leaner times.
- A ratio of 1:1 or lower means you’re in a tight spot. If your income drops and you don’t have enough reserves to cover it, you might end up having to take on loans.
The AR to AP ratio is one way that companies understand their financial health, so it’s critical that both numbers be accurate. Accounts receivable and accounts payable clerks have to make sure that nothing gets missed and that all invoices and receipts get filed correctly.
Accounts payable vs. accounts receivable roles and job descriptions
The job descriptions of accounts receivable and accounts payable clerks are essentially the same: track down invoices, record them and make sure the amount on paper is the same as what’s in the company accounts. Both roles require a detail-oriented mindset and a commitment to do everything right the first time.
Clerks in both departments record income and expenses on the same kind of balance sheet. If money is missing, the clerk has to track it down. If anything doesn’t balance, the clerk has to follow the paper trail to figure out why.
The main difference is where they go to track mistakes. Accounts payable clerks look for money within the company so they can get that money to vendors. In accounts receivable, clerks have to reach out to customers.
Salary differences
According to Glassdoor, an accounts payable professional in the US makes around $40,456 per year, with the potential for bonuses ranging from $538 to $5,498.
The average salary for an accounts receivable professional is close to the same at $36,841 with bonus opportunities from $400 to $6,400.
Accounts payable vs. accounts receivable examples
To understand how the two roles are the same and different, consider these two fictional clerks.
Example 1: Accounts Payable
Robin is balancing the books and notices that their employer, Widgets R Us, bought new printers on account in April. The balance is due on May 1 and Robin needs to make sure that the money gets sent. They check their email and make a few calls.
By the end of the day, they found out that the invoice has been stuck in approval. Robin pushes it through, and the seller gets the money it’s owed.
Example 2: Accounts Receivable
Shawn works for Accounts Receivable at Sugar Rush Company. When they log on to the system in the morning, they find that the company has an overdue invoice outstanding with Tasty Candies Inc.
Shawn calls Tasty Candies and learns that the client never received the invoice. Shawn makes a note of the call and sends another invoice to Tasty Candies, which then pays the money it owes.
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The accounts receivable and payable departments are crucial components of a well-run company. The positions need to be staffed by good workers, and it’s important that companies invest in tools that help those people keep accurate records.
