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 landscape. Accounts Payable refers to the amounts that a business owes to its suppliers for goods and services purchased on credit. It represents the company's obligations to pay its vendors and is considered a liability on the balance sheet. This is crucial for managing cash flow and ensuring that the business meets its financial commitments.

On the other hand, Accounts Receivable tracks the amounts owed to the business by its customers for sales made on credit. This entry reflects the income the business expects to receive and is categorized as an asset on the balance sheet. Effective management of Accounts Receivable is vital for maintaining liquidity and ensuring that the company can finance its operations.

Understanding this difference helps in accurately recording transactions and managing a business's finances effectively. It allows for informed decision-making when it comes to cash management, budgeting, and overall financial planning.