The essentials of receivables and payables: differences and accounting

Receivables and payables may seem like opposites, but what are the differences in accounting terms?

Your business generates both receivables and payables: you sell products or services, but you also buy raw materials from suppliers or use the services of a third party, not to mention the money you owe to the bank.

Which balance sheet accounts and headings should you carry them under to translate them into accounting entries?

Find the answers in this article:

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What is the difference between receivables and debts?

Receivables: definition

A receivable is a sum owed to a company or individual by a debtor, who may be a natural or legal person. It is a right that he or she exercises to claim payment.

A claim is legally valid under 3 conditions:

• it is certain, i.e. there is contractual proof, such as an invoice, an order form or a contract;
• it is liquid, i.e. quantifiable;
• it is due: there is a payment deadline.

💡 Example of a receivable: a rent receipt represents a receivable for the lessor.

When a company talks about customer receivables or operating receivables, it is referring to an amount owed to it by a customer, resulting from the sale of a product or service.☝️

Debt: definition

A debt is a sum owed by a company or individual to a creditor, to whom he or she owes money. It is a payment obligation, a commitment to be fulfilled on pain of penalties.

💡 Example of a debt: the repayment of a loan is a debt for the borrower.

What is an operating debt? This term includes supplier debts, tax debts and social security debts, among others.

☝️ An outstanding debt is one that has not been paid by the due date. To solve cash-flow problems linked to late or non-payment of invoices, companies need to collect debts as quickly as possible.

How are payables and receivables recognised?

In accounting, a distinction is made between :

• the financial receivable and the financial debt, related to the financing of the company,
• non-financial receivables and non-financial debts, relating to its current operations.

Here are two tables to help you distinguish between them, the accounts involved and whether they are assets or liabilities for the balance sheet.

Financial receivables and payables

• example of a financial receivable: a loan to another company
• example of a financial liability: a loan from a bank

Non-financial receivables and payables

• example of a non-financial receivable: the provision of a service
• example of a non-financial debt: social security contributions

All receivables and payables are recorded on the balance sheet until they are settled.

Read also: Assets and liabilities: what is the difference between these two pillars of the balance sheet?

☝️ Financial receivables and payables do not have to be broken down on the balance sheet (spread over several financial years or products and services).

However, if financial receivables and payables are substantial, they must be broken down in the notes to the financial statements, in the statement of maturities of receivables and payables, according to their due dates.

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[Bonus] Principle of offsetting receivables and debts

In the business world, we talk about offsetting a claim against a debt or extinguishing reciprocal debts, when a company comes to an arrangement with one of its debtors, to whom it owes money, to cancel the equivalent sums on both sides.

Offsetting is highly regulated and can be :

• legal: the debts are reciprocal and interchangeable ;
• conventional: the two creditors and debtors agree on the terms of set-off;
• judicial: a judge must intervene if no agreement has been reached.