What distinguishes Accounts Receivable from Accounts Payable?

Accounts Receivable and Accounts Payable are two fundamental aspects of a company's financial operations, distinguished primarily by the direction of cash flow they represent.

Accounts Receivable refers to the money that a company is owed by its customers for goods or services delivered but not yet paid for. This represents cash inflow for the business when the customers pay their invoices. Hence, it is often considered an asset on the balance sheet because it signifies future cash that will enhance the company's liquidity.

On the other hand, Accounts Payable pertains to the obligations a company has to pay its suppliers or creditors for goods or services received but not yet paid for. This results in cash outflow when the company settles these debts. Accounts Payable is classified as a liability on the balance sheet, indicating that it represents money that will need to be paid out.

Thus, the distinction that Accounts Receivable represents cash coming into the business while Accounts Payable indicates cash flowing out is critical for understanding a company’s cash flow management and overall financial health.