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 company's activity 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 over to in order to translate them into accounting entries?

Find the answers in this article:

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What's the difference between receivables and payables?

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, order form or 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 is indebted. 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 debts, among others.

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

How do you account for payables and receivables?

In accounting, a distinction is made between :

• financial receivables and financial debts, related to the financing of the company,
• non-financial receivables and non-financial debts, linked to current operations.

Here are two tables to help you differentiate 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 debt: 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 remain on the balance sheet until they are settled.

See also: Assets and liabilities: what's 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 (i.e., 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 balance sheet, in the statement of maturities of receivables and payables, according to their due dates.

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[Bonus] The 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 itself, to cancel the equivalent sums on both sides.

Offsetting is highly regulated and can be :

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