Accounts payable vs. accounts receivable explained

Accounts receivable and accounts payable; while often grouped together are two very different accounting functions, on entirely different spectrums of the accounting field when their responsibilities are actually broken down.

Some businesses have a whole team of accounts payable officers and one account receivable officer or vice versa. Some have one employee, say a bookkeeper, that handles both the accounts payable and the accounts receivable functions. How much a business invests into each of these accounting functions depends on their individual business needs.

This blog will take you through precisely what is accounts payable and accounts receivable: what tasks are involved in each, where they fit in a business’s structure and how to know whether you need one, two or a hybrid of both roles across your accounting team.

What is accounts receivable?

Accounts receivable is the accounting function responsible for following up on money owed to the company by its debtors on credit. It is any payment or proceeds owed to a business thanks to the goods or services it has provided to its customers. AR as the title implies, means that the money is not yet “received” by the company.

The credit part can be confusing. Simply put, the word “receivable” in “accounts receivable” means the payment from the customer has not been “realised” yet on the company’s books. Instead, it’s an “I-owe-you” transaction where the customer who purchased these goods owes the company payment after a specified time.

Why not just pay in cash? For example, if a customer goes to a clothing store, purchases a shirt, and pays for it in cash, wouldn’t that be more efficient than having to owe an amount later? The answer is yes, but not often possible when done on a larger scale. 

All in all, if a customer cannot outright pay the company in cash for a good or service, that’s where the accounts receivable function within the company comes into play to ensure payment is eventually received.

How do you know if you need one, two or a team of accounts receivable officers?

It depends. If you are a utility company, you may find that you would have a large team of accounts receivable officers as you’re constantly chasing unpaid bills that give customers between 30 to 90 days to pay their rates. If you are a fast-food franchise owner, you may not need a large team of accounts receivable officers, as customers pay for their food before receiving it.

What is the main difference between these two companies? One can operate efficiently by providing goods and services before receiving payment, while the other requires payment before delivering the goods and services. 

Why? Some companies need payment beforehand to ensure that resources are continually maintained for production levels. If it takes longer to receive a resource to provide a good or service, then a longer payable timeframe is more suitable.

However, every business is different and should tailor their accounts receivable team structure to their business needs.

What tasks does an accounts receivable officer do?

Accounts receivable officers are responsible for, but not limited to:

• Reconciling of customer accounts
• Reconciling general ledger and bank statements
• Commission calculations
• Month-end and year-end processes
• Financial and sales reporting
• Preparing and processing monthly journal entries
• Maintaining the billing system
• Generating invoices and account statements
• Maintaining accounts receivable files and records
• Investigating and resolving any irregularities or enquiries
• Working with required accounting software such as MYOB, Xero or Quickbooks.

What is accounts payable?

On the other hand, accounts payable is the accounting function responsible for following up on money that the company owes to its creditors. Any payment or proceeds that a business owes to another business thanks to the goods or services it has received. Accounts payable means that the money is not yet “paid” by the company to whoever it is owed to. 

Think short-term debts or monetary obligations. Compared to the examples above for accounts receivable, the company now does not have the funds to pay off its debtors and is on the paying end of these scenarios. In other words, the accounts payable function is responsible for paying invoices issued by another company's accounts receivable team; within the given timeframe.

Suppose a company cannot pay outright in cash another company for the goods or services it receives. In that case, the accounts payable function comes into play to ensure the money is paid within the given timeframe.

How do you know if you need one, two or a team of accounts payable officers?

Again, like accounts receivable, it depends. If you are a company that requires a lot of resources and purchases these from various vendors, then it would make sense to have a team of accounts payable officers to ensure invoices are paid. 

If you are a company that doesn’t require many resources purchased to operate, your accounts payable function will be more minor. It entirely depends on your business requirements and can vary as the business matures and grows.

What tasks does an accounts payable officer do?

Accounts payable officers are responsible for, but not limited to:

• Checking invoice accuracy
• Inputting and coding invoices correctly
• Matching invoices and purchase orders
• Processing and paying invoices
• Following internal payment approval processes
• Scheduling payment runs
• Managing creditor enquiries for payment
• Processing employee expense claims
• Performing reconciliations
• Monthly reporting
• Working with required accounting software such as MYOB, Xero or Quickbooks.

What is the main difference between accounts payable and accounts receivable?

Accounts payable is the money a company owes to another, while accounts receivable is the money that is owed to the company itself. When one company transacts with another on credit, one will record an entry to accounts payable on their books while the other records an entry to accounts receivable.

Why do companies often create hybrid accounts payable and accounts receivable positions?

This often comes down to resources, particularly in smaller organisations. Sometimes, it’s not justifiable, financially, for companies to hire an accounts receivable officer AND an accounts payable officer. By combining the two accounting functions, say an accounts assistant or accounts administrator job role, companies can save on money and overheads by hiring one person to do a two-person job.

But, is this sustainable long-term? What happens if, due to company growth and scalability, there is now a need for a full-time accounts receivable officer or team and vice versa for the accounts payable function? 

How can companies overcome the increase in employment costs to establish an accounting team dedicated to monitoring debtors and invoices? A solution, outsourcing.

Why are accounts receivable and accounts payable suited for outsourcing?

By hiring an outsourced accounts payable or receivable team, companies can meet industry demands and scale while saving on employment costs by up to 70%.

Because accounts payable and receivable tasks are not considered core to your business and are back-office in nature, they can be easily completed by an offshore staff member. What’s more, without the distractions of your local office, work is often more accurate and efficient.

Not only does outsourcing these accounting functions save on costs, but businesses can remain viable in today’s increasingly competitive environment. This case study, “How to scale and grow your accounting firm through outsourcing”, explains how easily outsourcing can assist accountancy firms with business growth.