Explain the difference between accounts payable and accounts receivable
Theme: Accounting Role: Accountant Function: Finance
Interview Question for Accountant: See sample answers, motivations & red flags for this common interview question. About Accountant: Manages financial records and ensures compliance with regulations. This role falls within the Finance function of a firm. See other interview questions & further information for this role here
Sample Answer
Example response for question delving into Accounting with the key points that need to be covered in an effective response. Customize this to your own experience with concrete examples and evidence
- Definition: Accounts payable refers to the money that a company owes to its suppliers or vendors for goods or services received but not yet paid for. Accounts receivable, on the other hand, refers to the money that a company is owed by its customers for goods or services provided but not yet received payment for
- Purpose: Accounts payable is a liability for the company as it represents an amount owed to others. It is recorded on the balance sheet and reflects the company's short-term obligations. Accounts receivable, on the other hand, is an asset for the company as it represents the amount that is expected to be received. It is also recorded on the balance sheet and reflects the company's short-term assets
- Timing: Accounts payable is typically paid within a specified period, often referred to as the payment terms, which can vary depending on the agreement with the supplier. Accounts receivable, on the other hand, is collected within a specified period, often referred to as the payment terms or credit terms, which can vary depending on the agreement with the customer
- Recording: Accounts payable is recorded as a liability in the company's financial statements, specifically on the balance sheet. It is usually categorized under current liabilities. Accounts receivable, on the other hand, is recorded as an asset in the company's financial statements, specifically on the balance sheet. It is usually categorized under current assets
- Management: Accounts payable is managed by the company's accounts payable department, which is responsible for processing and paying invoices from suppliers. Accounts receivable is managed by the company's accounts receivable department, which is responsible for invoicing customers, tracking payments, and following up on overdue payments
- Impact on Cash Flow: Accounts payable has a direct impact on the company's cash flow as it represents an outflow of cash when payments are made to suppliers. Accounts receivable, on the other hand, has an indirect impact on cash flow as it represents an inflow of cash when payments are received from customers
- Relationship: Accounts payable and accounts receivable are closely related as they both involve financial transactions between a company and its external parties. They are part of the company's overall financial management and play a crucial role in maintaining healthy cash flow and financial stability
Underlying Motivations
What the Interviewer is trying to find out about you and your experiences through this question
- Knowledge & understanding of basic accounting principles: Ability to differentiate between accounts payable and accounts receivable
- Attention to detail & accuracy: Ability to accurately record and track financial transactions
- Analytical skills: Ability to analyze and reconcile accounts payable and accounts receivable balances
- Organizational skills: Ability to manage and prioritize payment obligations and collections effectively
- Communication skills: Ability to effectively communicate with vendors, customers, and internal stakeholders regarding payment and collection matters
Potential Minefields
How to avoid some common minefields when answering this question in order to not raise any red flags
- Confusing or incorrect definitions: Providing inaccurate or unclear explanations of accounts payable and accounts receivable
- Lack of understanding of the relationship between the two: Failing to explain that accounts payable represents money owed by the company to its creditors, while accounts receivable represents money owed to the company by its customers
- Inability to provide examples: Not being able to provide specific examples or scenarios to illustrate the concepts of accounts payable and accounts receivable
- Failure to mention importance in financial management: Neglecting to highlight the significance of effectively managing accounts payable and accounts receivable for cash flow and overall financial health of the company
- Lack of knowledge about relevant accounting principles: Not demonstrating familiarity with basic accounting principles such as accrual accounting and the matching principle, which are fundamental to understanding accounts payable and accounts receivable