Accounts Payable vs Accounts Receivable: What’s the Difference?
Accounts payable and accounts receivable are opposite sides of a coin. When your business owes someone, it is accounts payable. When others owe your business, it is accounts receivable.
Your business bought goods from another business. The money you owe them for the goods is accounts payable. On the other hand, if another business bought goods from your company, the money they owe you is accounts receivable.
There are a lot of differences between AP and AR. Learning the differences and similarities between accounts payable and accounts receivable is important for successful business. Here you will learn the difference between accounts payable and accounts receivable:
Key Takeaways
- Accounts payable (AP) is money your business owes; accounts receivable (AR) is money owed to you.
- AP is a liability; AR is an asset, opposite sides of your balance sheet.
- One transaction can create AP for the buyer and AR for the seller simultaneously.
- Track AP with Days Payable Outstanding (DPO); track AR with Days Sales Outstanding (DSO).
- Faster AR collection and smarter AP timing equal stronger cash flow.
- Spreadsheet errors and delays are a sign it’s time to bring in a dedicated virtual assistant for accountants to manage AP/AR.
What is Accounts Payable?
Accounts payable is the money a business is indebted to its suppliers for goods or services they have not paid for but already received. In your balance sheet, accounts payable acts as a short-term liability. It is a liability because it holds an obligation the business needs to settle.
But not all payments by the business fall under accounts payable, such as employees’ salaries. Accounts payable are typically recorded upon terms both parties agreed on.
Some common examples of Accounts payable are:
- Buying goods or services from a supplier
- Purchasing raw materials needed for production
- Covering employee travel costs
- Leasing equipment or machinery for business use
- Paying for the transportation of goods to customers
You can label these transactions into different categories such as:
- Taxes due to government authorities
- Wages payable to employees
- Loans that remain outstanding and require repayment
- Nontrade payables obligations unrelated to your core business operations
- Trade payables amounts due for goods or services purchased to support your business
How to Record Accounts Payable
On the balance sheet, accounts payable are recorded as the cost in an expense account and listed as the money outstanding in Accounts Payable. Recording accounts payable correctly is important for tracking the company’s expenses and growth properly. As the volume of invoices and supplier payments grows, some businesses use accounts payable outsourcing services to keep the process organized and accurate.
Example Entry:
- Debit: Expense account (e.g., inventory, supplies)
- Credit: Accounts Payable (liability)
Once Payment is Made, the Entry is Reversed:
- Debit: Accounts Payable
- Credit: Cash or Bank account
What is Accounts Receivable?
Accounts receivable is the exact opposite of accounts payable. AR represents money that customers or clients are overdue to the business. It means the amount due to the business for products and services they have already provided but not yet paid for.
The process starts as soon as customers or clients purchase goods or services on credit. The company sends the goods with an invoice, a step many businesses outsource through an invoice form data entry service to avoid errors. Accounts receivable is counted as an asset in the balance sheet because the company is expected to receive the payment within a certain time period.
- Invoices sent to customers for goods delivered but not yet paid for
- Payments due from clients for services already rendered
- Outstanding balances due by customers who purchased on credit
- Amounts unsettled by retailers or distributors who bought inventory on account
- Unpaid rent by tenants for a property
- Unpaid insurance claims by a provider
You can categories these transactions into different categories such as:
- Amounts payable by customers for goods or services sold on credit
- Amounts overdue that aren’t tied to core sales, such as employee advances or tax refunds
- Expected to be collected within a year
- Expected to be collected after a year
- Payments not received by the agreed due date
- Amounts unlikely to be collected/
How to Record Accounts Receivable
Recording accounts receivable is crucial for maintaining a clean and accurate balance sheet. Here is how accounts receivable are typically recorded:
- Debit: Accounts Receivable (asset)
- Credit: Sales Revenue (income)
Once the payment is received, the entry looks like this:
- Debit: Cash or Bank
- Credit: Accounts Receivable
Accounts Payable vs Accounts Receivable: The Key Difference
For every sale or purchase in your business. You will either issue or receive an invoice. If you are selling or providing the service, the finance team will record it in your accounts receivable (AR) section. On the other hand, if you are purchasing a service or goods, your finance team will store it as accounts payable (AP).
Key Differences, AR vs AP
Here are some key differences between Accounts receivable and accounts payable:
| Category | Accounts Receivable (AR) | Accounts Payable (AP) |
| What it is | Money due to the company | Money the company must pay |
| Balance sheet | Current asset | Liability |
| Tracks | Client balances | Vendor balances |
| Cash flow direction | Incoming | Outgoing |
| Key metric | Days Sales Outstanding (DSO) | Days Payable Outstanding (DPO) |
| Balance moves | Rises with credit sales, falls when customers pay | Rises with credit purchases, falls when you pay |
| In short | What customers still need to pay you | What you still need to pay vendors and suppliers |
| Process flow | sale>invoice issue>payment followup>cash receipt>recording and reporting | Receiving invoice>invoice verification>process approval>Payment processing>reconciliation |
| Who’s involved | Sales team, billing/collections | Procurement, accounts payable clerk |
| Key document | Sales invoice you issue | Vendor bill/invoice you receive |
| Typical terms | Net 15/30/60 offered to customers | Net 15/30/60 offered by suppliers |
| Risk if mismanaged | Debt, cash shortages, strained customer relationships | Late fees, damaged vendor relationships, missed early-payment discounts |
| Goal | Collect faster (lower DSO) | Pay strategically, without hurting vendor trust (optimize DPO) |
| Journal entry | Debit AR, credit Revenue | Debit Expense, credit AP |
| Health signal | Rising DSO = collections slowing down | Rising DPO = taking longer to pay |
Understanding the key difference between AP and AR is crucial for maintaining proper balance sheets. It helps the finance leader make informed decisions while working with capital, liquidity, and financial operations.
Both are important components of the accounting cycle and balance sheet management. Proper management of AR and AP impacts cash flow significantly.
One Transaction, Two Sides: An AP and AR Example
AR and AP are one transaction, but have two sides of the same financial coin. Understanding both AP and AR is essential for mastering both and is essential for making mature financial decisions.
Here is an example of AP and AR that highlights the one transaction, two sides theory:
A small business specializing in handcrafted candles received an order of 1,000 candles from a company. The total amount was $5,250; to secure the deal, the company paid $2,100 upfront, which covers 40% of the total amount.
The 2 companies, buyer and seller, came to an agreement to settle the remaining balance of $3,150 within 3 months. As the candles were shipped and delivered, the seller recorded it in a book. Since only a portion of the money was paid, the unpaid portion was logged under accounts receivable.
At the end of 3 months, the buyer company fulfilled their promise and transferred the remaining $3,150. The receivable was cleared, and the transaction closed.
The Numbers and the Logic Behind Them
Not all the money in this deal worked the same way. Some was paid right away, some was owed. Below, we break down each part and explain why it counts as AP or AR:
The same numbers work differently for both buyer and seller sides. Here is the breakdown:
| Line Item | Amount | AR or AP? |
| Total sale price | $5,250 | Neither, this is the full contract value |
| Upfront payment | $2,100 | Neither, cash changed hands immediately |
| Remaining balance | $3,150 | AR on seller’s books, AP on buyer’s books |
Logic Analysis
Here is a logic analysis of One Transaction, Two Sides from both the buyer and seller perspective:
When the buyer pays the remaining $3150 to the seller, AP drops to zero. Along with that, when the seller receives the money, their AR drops to zero as well. This is how a single transaction has two sides and becomes AR and AP for the seller and buyer sides.
Is Accounts Payable a Debit or a Credit?
Accounts payable is normally a credit. Owing money to vendors makes AP a liability, and liability accounts carry a credit balance by default. Accounts receivable works the opposite way, since it is an asset account and normally carries a debit balance.
How AP and AR Affect Your Cash Flow
AP and AR dictate your cash flow with a term called “cash flow gap”. Cash flow gap is the gap between when you pay your vendor and when your customers pay you. For example, if you pay your vendor on day 1, but your customer pays you after 90 days, now you have a 90-day cash flow gap.
AP and AR dictate cash flow heavily. Your net cash flow is basically a tug of war between AR and AP. If one increases, the other one decreases.
There are 2 ways you can improve cash flow, and they are:
- To increase cash flow, you will have to collect AR faster and delay AP slightly.
- To decrease cash flow, you have to let your accounts receivable sit unpaid for 60+ days while paying your vendors faster.
4 Strategies to Optimize AP and AR
If your objective is increasing cash flow, you must control AP and AR with different strategies. Here are 4 strategies to optimize AP and AR:
If you want your customer to pay earlier, you can do it by giving them an incentive for paying early. A common US practice is using the “2/10 net 30” method. If the customer pays within the first 10 days, they get a 2% discount.
Otherwise, the full amount stays unpaid for the full 30 days. But here’s the trick, paying just 20 days early to save 2% works out to a 36.7% annualized return. According to the U.S. Treasury’s Prompt Payment Discount Calculator. That’s a much better return than most businesses earn holding the cash elsewhere. This is exactly why finance teams jump on early payment discounts whenever they can.
Customize Your Payment Terms
Most customers go for the default “net 30” process because that’s what everyone else is doing. If you want to increase your money flow, you can try customizing it. Make it “net 15,” and there is a chance of higher cash flow
Schedule Vendor Payments Strategically
Instead of paying bills as soon as they arrive, make payments strategically. Keep a bookkeeper who can schedule your transactions strategically.
For example, if a large customer is paying on the 15th, schedule your vendor payment for the 16th. This keeps the bank balance stable and secure for your business.
Automate Invoice Reminders
Many customers don’t pay on time because they forget about the payment. Use accounting software that will send them a reminder 3 days before the payment date and 3 days after if the payment is late.
It will help your customers remember that they have to pay you. Scheduling it earlier might even cause the customers to arrive earlier and improve cash flow. It drastically removes the awkwardness of chasing payments and days sales outstanding (DSO).
Signs Your AP or AR Process Has Outgrown a Spreadsheet
Many signs indicate your AP or AR process has outgrown a spreadsheet. Some of them include high-volume data entry requirements, frequent human errors, lack of audit, delayed invoicing, and many more. If you are facing these issues, chances are your AP or AR process has outgrown a spreadsheet.
Lack of Data Accuracy
The most important factor in a spreadsheet is data. If the data lacks accuracy, it can be a huge issue. You might send wrong invoices with the wrong amount of payments. Most of the time, behaviors like this can damage long-term business relations.
Multiple Versions of the Same Spreadsheet Exist
If your whole team has multiple versions of the same spreadsheet, this is a bad sign. It means every team is using a different sheet, not knowing which one is correct. And when it is time to make a real decision, your team has to follow all three.
This is time-consuming, hassling, and more open to excuses. If your team has multiple versions of the same sheet, it is a sign your AP or AR process has outgrown a spreadsheet.
Consistent Human Errors
A complicated invoice, one wrong number, a formula that’s operating in the wrong cell- things like these can cause huge problems. If your spreadsheet looks like this, then it’s confirmed that your AP or AR process has outgrown a spreadsheet. This can cause direct revenue impact and wrong payments to clients, which is slowly pushing your business into ruin.
There is Only One Person Who Really Understands the Spreadsheet
If only the person inside your team really understands the spreadsheet, it is a bad sign. If that person is sick, on vacation, or leaves the company, it is a big problem. Critical operations often slow down or stop entirely. This is a bottleneck to the growth of your business and harmful for your clients as well.
Building a Report Takes More Than an Hour
Building a report should be fast and accurate. But sometimes, because of unusual data management in spreadsheets, it might take hours to build a simple report. On top of that, it is even harder to believe the numbers in it.
If you are facing this issue, chances are high that your AP or AR process has outgrown a spreadsheet.
Security and Privacy
Security is the top priority in the AP or AR process. If anyone can see your data, it is easier for them to do frauds and scams. Imagine you take years to build a business and someone with that data is ruining your business.
Complexity and Scale
Spreadsheets have limitations when it comes to scaling huge amounts of data. If you also have a huge data set, chances are high your business developers are having a hard time analysing it. It can cause wrong information, wrong payments, and much more.
If your team is having a hard time scaling data, this is a red flag.
Team Members Are Overwriting Each Other’s Work
Imagine 2 team members working on the same sheet; one just changes what the other one corrected. Even with cloud-based systems, these issues are common. Collaboration conflicts often show up like merge conflicts, accidental deletion, and many others.
New Employees Have Trouble Understanding the Data
If a new employee needs to shadow a spreadsheet expert for 2 weeks, the data is not organized and memorized. These kinds of issues cause many issues such as waste of time, internal conflicts, newbies making avoidable mistakes, etc.
If your company is facing these issues, it’s sure your AP or AR process has outgrown a spreadsheet. These kinds of issues can cause serious damage in the long run. Both AP and AR require precision, integration, and team collaboration.
But spreadsheet issues can hamper all of them. If you are one of the unlucky people facing this issue, try considering outsourcing to an accounting data entry specialist instead.
Who Should Manage AP and AR at a Small Business?
AP and AR in small businesses are typically managed by business owners, in-house bookkeepers, outsourced bookkeepers, dedicated staff, etc. But it varies from business to business depending on some factors. These factors include company size, company goals, budget, transaction volume, cash flow management, and many more.
Depending on these facts here is who should manage AP and AR at a small business:
Owner
Owners should handle AP and AR if they want absolute control over cash flow. If the reason is ensuring total financial confidentiality and eliminating extra cost, it is a good choice for the owner to handle it. Or if the business is too small and can’t afford external help, the owner should handle AP and AR.
Virtual Assistant
Virtual assistants are a good fit for companies looking for a generalist rather than an expensive financial professional. If the tasks are like offloading repetitive data entry, typing basic invoices, virtual assistants can get the job done.
In-house Bookkeeper
If the main task is to handle real customer and vendor interactions and resolve data-related issues, in-house bookkeepers are a good choice. They are good for keeping the operation tightly connected to in-house.
FAQs
Is invoicing accounts payable or accounts receivable?
Invoicing falls under accounts receivable. When a business sends an invoice for goods or services it provides, its accounts receivable department handles it. The business receives the invoice and records the amount owed as accounts payable.
Can one person handle both accounts payable and accounts receivable at a small business?
Yes, one person can handle both AP and AR in small businesses. It is pretty normal for businesses to handle both sides by a single person. Mostly small companies with low revenue do it.
What is an example of accounts payable and accounts receivable from the same transaction?
When Company A buys goods from Company B on credit, Company B records accounts receivable for the money. And Company A records accounts payable for the money it must pay.
What happens if a business falls behind on accounts payable or accounts receivable?
It harms credit score, leads to supplier lawsuits, and causes lagging in cash flow. Other than that, the customer loses trust and can cause late fees, supply halts, slow growth, and many more.
Is accounts receivable an asset or a liability?
Accounts receivable is an asset. Because in accounts receivable, the company receives money, which is named as a current asset on the balance sheet. So accounts receivable is an asset.
How often should a small business reconcile accounts payable and accounts receivable?
It entirely depends on the business and their goals. If it is a very small business with few employees, once a month is fine; if the transaction volume is high, you can choose weekly, or even reconcile daily AP and AR.
