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 position. Accounts payable represents the obligations or debts that a business has incurred, typically for goods and services purchased on credit. This means that the business owes money to its suppliers or creditors. On the other hand, accounts receivable denotes the money that is owed to the business by its customers for goods and services that have been provided but not yet paid for.

Thus, the correct understanding is that accounts payable is a liability because it indicates money that the business needs to pay out, while accounts receivable is an asset, reflecting amounts that the business will receive in the future. This relationship is crucial for managing cash flow and ensuring that the business can meet its financial obligations while also tracking incoming revenue from customers.