Accounts Payable vs Accounts Receivable: Differences, Examples and How to Manage Both

Accounts payable and accounts receivable are mirror images. Every time one business sells to another on credit, the seller records a receivable and the buyer records a payable. Inside a single business, both exist at once: customers owe you money while you owe money to suppliers. How you manage the two determines how much cash you have on hand, how much you need to borrow and how healthy your supplier and customer relationships are.

This guide compares AP and AR side by side, shows the journal entries for each, explains the processes and metrics, introduces the cash conversion cycle, and walks through a worked example of how changes in AR and AP affect cash. If you want more depth on the payables side alone, see what is accounts payable.

Definitions

Accounts receivable (AR): amounts owed to a business by its customers for goods or services delivered on credit. AR is a current asset, because the business expects to collect it, usually within weeks.

Accounts payable (AP): amounts a business owes to its suppliers for goods or services received on credit. AP is a current liability, because the business must pay it, usually within weeks.

A quick way to remember the difference

Think about the direction of the money and the word endings:

• Receivable: you will receive money. It sits on the asset side because it is something of value you hold, a claim on a customer.
• Payable: you will pay money. It sits on the liability side because it is an obligation.

Another check: if a balance would disappear when cash comes into your bank account, it is a receivable; if it would disappear when cash goes out, it is a payable. Refunds reverse the usual direction: a refund you owe a customer is a payable-type liability, and a refund a supplier owes you is a receivable-type asset, often shown as a debit balance on the supplier's account.

Side-by-side comparison

Aspect	Accounts receivable	Accounts payable
Meaning	Money owed to you	Money you owe
Balance sheet	Current asset	Current liability
Created by	Your sales invoices	Supplier invoices
Counterparty	Customers	Suppliers (vendors)
Cash effect when settled	Cash in	Cash out
Goal	Collect quickly and fully	Pay on time, not early (unless discounted)
Key report	AR ageing	AP ageing
Key metric	Days sales outstanding (DSO)	Days payable outstanding (DPO)
Main risk	Bad debts, slow payers	Late fees, fraud, duplicate payments
Team	Credit control, billing, collections	AP, purchasing

One transaction, two sides

Suppose Studio A sells design work to Retailer B for 5,000 on 30-day terms.

Studio A (seller) records AR:

Account	Debit	Credit
Accounts receivable	5,000
Revenue		5,000

Retailer B (buyer) records AP:

Account	Debit	Credit
Marketing expense	5,000
Accounts payable		5,000

When Retailer B pays 30 days later:

Studio A:

Account	Debit	Credit
Cash at bank	5,000
Accounts receivable		5,000

Retailer B:

Account	Debit	Credit
Accounts payable	5,000
Cash at bank		5,000

Tax such as VAT would add output tax for the seller and recoverable input tax for the buyer, where applicable.

The AR process

1. Credit checks on new customers and credit limits.
2. Invoicing promptly and accurately, with clear terms and references. See what is an invoice.
3. Delivering invoices to the right person or AP inbox.
4. Tracking with the AR ageing report.
5. Reminders and collections before and after due dates.
6. Applying payments received to the right invoices.
7. Handling disputes and credit notes.
8. Writing off bad debts when collection is not possible, following accounting and tax rules.

The AP process

1. Supplier onboarding with verified bank details.
2. Purchase orders for defined spending.
3. Receiving and validating invoices.
4. Matching to POs and receipts. See three-way matching.
5. Approval according to an approval matrix.
6. Recording in the ledger.
7. Payment on the due date.
8. Reconciliation of supplier statements and bank accounts.

Ageing reports

Both AR and AP use ageing reports that bucket balances by age:

Customer	Current	1–30	31–60	61–90	90+	Total
Retailer B	5,000	0	0	0	0	5,000
Café C	0	1,200	0	0	0	1,200
Agency D	0	0	3,400	0	0	3,400
Shop E	0	0	0	0	650	650
Total	5,000	1,200	3,400	0	650	10,250

In AR, the older buckets drive collection actions and bad debt provisions; Shop E's 650 over 90 days may need a provision or write-off. In AP, the older buckets indicate overdue payments, disputes or approval bottlenecks.

Metrics: DSO, DPO and the cash conversion cycle

Days sales outstanding (DSO)

DSO = (average accounts receivable ÷ credit sales) × days in period

DSO measures how long, on average, customers take to pay. Lower is generally better for cash, and a rising DSO is often the first sign of collection problems.

Days payable outstanding (DPO)

DPO = (average accounts payable ÷ cost of purchases or cost of goods sold) × days in period

DPO measures how long, on average, the business takes to pay suppliers. Higher means you hold cash longer, but too high can strain relationships. See accounts payable turnover and DPO.

Days inventory outstanding (DIO)

DIO = (average inventory ÷ cost of goods sold) × days in period

Cash conversion cycle (CCC)

CCC = DIO + DSO − DPO

The cash conversion cycle measures how many days cash is tied up between paying for inputs and collecting from customers. A shorter cycle means the business needs less working capital.

Worked example

A wholesaler's annual figures:

• Credit sales: 3,650,000
• Cost of goods sold (equal to purchases for simplicity): 2,555,000
• Average AR: 400,000
• Average inventory: 350,000
• Average AP: 245,000

Calculations using 365 days:

• DSO = 400,000 ÷ 3,650,000 × 365 = 40 days
• DIO = 350,000 ÷ 2,555,000 × 365 = 50 days
• DPO = 245,000 ÷ 2,555,000 × 365 = 35 days
• CCC = 50 + 40 − 35 = 55 days

If the wholesaler reduced DSO by 10 days, through better invoicing and collections, AR would fall by about 3,650,000 ÷ 365 × 10 = 100,000, releasing that much cash. Extending DPO by 5 days by paying exactly on terms would add about 2,555,000 ÷ 365 × 5 = 35,000. Together, about 135,000 of cash released without any change in profit.

AR and AP on the cash flow statement

Using the indirect method:

• An increase in AR reduces operating cash flow (sales recognised, cash not yet received).
• A decrease in AR increases operating cash flow.
• An increase in AP increases operating cash flow (expenses recognised, cash not yet paid).
• A decrease in AP reduces operating cash flow.

That is why a growing business can be profitable yet short of cash: growing sales on credit increases AR faster than AP, and the gap has to be funded from cash reserves, the owner or a lender until customers pay.

Reconciling AR and AP with the bank

Neither ledger is reliable unless it agrees with what actually happened in the bank:

• AR: each customer payment on the bank statement should be applied to the correct invoice. Unapplied cash and payments posted to the wrong customer distort ageing and trigger unnecessary reminders.
• AP: each supplier payment should match an approved invoice. Payments without invoices may be errors or fraud.

Monthly bank reconciliation is the control that ties both together. If your statements are PDFs, a bank statement converter turns them into spreadsheets or import files, so receipts and payments can be matched quickly. See how to reconcile a bank statement.

How AR and AP differ across industries

The balance between receivables and payables depends heavily on the business model:

• Retail and hospitality: customers pay immediately by card or cash, so AR is small, while suppliers offer credit, so AP can be significant. These businesses often have short or even negative cash conversion cycles: they collect from customers before paying suppliers.
• Professional services: AR is large because clients pay weeks after work is done, while AP is relatively small, mostly rent, software and subcontractors. Collections discipline is the main working capital lever.
• Manufacturing and wholesale: both AR and AP are substantial, plus inventory. Working capital needs are often large and seasonal.
• Construction: AR includes retentions held back until project completion, and AP includes subcontractors, often under pay-when-paid arrangements where permitted. Timing mismatches can be severe.
• Subscription software: customers may pay annually in advance, creating deferred revenue (a liability) rather than AR, which improves cash flow.

Comparing your DSO and DPO with businesses in the same industry is more meaningful than comparing with businesses in general.

Software support for AR and AP

Task	AR features	AP features
Documents	Invoice templates, recurring invoices	Bill capture from email or scans
Tracking	Ageing reports, customer statements	Ageing reports, due-date lists
Automation	Automatic reminders, payment links	Approval workflows, payment runs
Matching	Apply bank receipts to invoices	Match bank payments to bills
Reporting	DSO, collection forecasts	DPO, cash requirements

Most small business accounting packages handle both well. Larger organisations may add specialist AR (collections) or AP (automation) tools. Whatever the tools, the bank feed or imported statement is what confirms that money actually moved.

Managing both well

Improving AR

• Invoice immediately and accurately.
• Agree clear payment terms and enforce them.
• Offer convenient payment methods.
• Send reminders before and after due dates.
• Check credit before extending terms.
• Resolve disputes quickly.

Improving AP

• Centralize invoice intake and approvals.
• Pay on due dates; take worthwhile discounts.
• Verify supplier bank details to prevent fraud.
• Reconcile supplier statements.

Balancing the two

The aim is not simply to collect fast and pay slow. Pressuring suppliers excessively can backfire with worse prices or supply problems, and pressing customers too hard can lose sales. Sustainable working capital comes from efficient processes on both sides.

Bad debts and doubtful receivables

Not every receivable is collected. Accounting frameworks generally require businesses to assess whether receivables are recoverable and to recognise expected losses. In practice:

• Specific provisions are made for individual customers known to be in difficulty or disputing invoices.
• General or expected-loss provisions are made on the remaining balance, often using percentages by ageing bucket based on experience.
• Write-offs remove receivables that will not be collected, after reasonable collection efforts.

A simple provision matrix might apply 1% to current balances, 5% to 31–60 days, 20% to 61–90 days and 50% or more to balances over 90 days, adjusted for known circumstances. Tax rules on deducting bad debts differ by country, so check with an accountant before writing off significant amounts.

There is no equivalent on the AP side, but old AP balances deserve review too: they may be duplicates, disputed amounts or credits never applied.

Financing receivables and payables

Both ledgers can be used to manage cash:

• Invoice financing and factoring let a business borrow against, or sell, its receivables to receive cash earlier. Costs vary, and factoring may involve the financier collecting from customers directly.
• Supply chain finance (reverse factoring) lets suppliers be paid early by a financier, based on the buyer's approved invoices, while the buyer pays the financier on the original due date. It can benefit both parties but should be disclosed appropriately in financial statements.
• Trade credit insurance protects sellers against customer non-payment.

These tools are useful, but they do not fix underlying process problems. Slow invoicing or poor approval workflows are cheaper to solve than to finance.

When customer and supplier records disagree

Because one invoice appears in both the seller's AR and the buyer's AP, the two should agree. They often do not:

Seller's AR shows	Buyer's AP shows	Likely cause
Invoice open	Invoice not recorded	Invoice not received or sent to wrong address
Invoice open	Invoice paid	Payment not yet received, applied to wrong invoice or sent to wrong account
Credit note issued	Original invoice still open	Credit note not received or not applied
Balance 5,000	Balance 4,900	Bank charges deducted from payment, or a disputed amount

A statement of account sent by the seller, or a supplier statement reconciliation done by the buyer, brings these differences to light. Regular reconciliation with major trading partners saves time and avoids disputes.

Worked example

A supplier's statement shows four open invoices totalling 18,400. The buyer's AP ledger shows three open invoices totalling 12,900. Comparing line by line: one invoice for 5,200 was never received by the buyer (it was emailed to a former employee), and the buyer recorded a credit note for 300 that the supplier has not yet applied on its own records. Difference: 18,400 − 12,900 = 5,500 = 5,200 + 300. The buyer records the missing invoice after approval, and the supplier corrects its records for the credit note.

Who manages AR and AP in a small business?

In small businesses, the same person, often the owner or a part-time bookkeeper, handles both. A simple weekly routine works:

• Monday: review the AR ageing report and send reminders for overdue invoices.
• Wednesday: record new supplier bills and approve them.
• Friday: pay bills due in the coming week and apply customer payments received.
• Month-end: reconcile the bank, review both ageing reports and reconcile any large supplier statements.

Accounting software automates much of this: invoice reminders, bill capture, bank feeds and matching suggestions.

Common mistakes

• Confusing AR and AP in the ledger, especially with refunds and credit notes.
• Recording customer deposits as revenue instead of a liability.
• Not applying receipts to invoices, leaving AR overstated.
• Paying suppliers early by default, wasting cash.
• Ignoring old balances in either ledger.
• Not reconciling to the bank, so ledgers drift from reality.

Frequently asked questions

What is the difference between accounts payable and accounts receivable?

Accounts receivable is money customers owe your business and is an asset. Accounts payable is money your business owes suppliers and is a liability. The same invoice is a receivable for the seller and a payable for the buyer.

Is accounts receivable an asset?

Yes. Accounts receivable is a current asset because it represents money the business expects to collect from customers, usually within a year.

Can a business have both AP and AR?

Yes, almost every business that buys and sells on credit has both: customers owe it money while it owes money to suppliers.

Should I record customer deposits as accounts receivable?

No. A deposit received before you deliver goods or services is a liability, often called customer deposits or deferred revenue, because you owe the customer the supply. It becomes revenue when you deliver, and no receivable is needed for the amount already paid.

What is a good cash conversion cycle?

It depends on the industry. Retailers with fast-moving stock and cash sales can have very short or even negative cycles, while manufacturers and wholesalers often have longer ones. Compare with your own history and similar businesses.

How do AR and AP affect cash flow?

Rising receivables absorb cash because sales are not yet collected; rising payables free cash because purchases are not yet paid. Managing both is a key lever on operating cash flow.

Summary

Accounts receivable is money coming to you, an asset; accounts payable is money you owe, a liability. Manage AR by invoicing promptly and collecting reliably; manage AP by paying accurately and on time. Measure both with DSO, DPO and the cash conversion cycle, and reconcile both against the bank so the ledgers reflect real cash.

Convert bank statements with StatementPilot to match customer receipts and supplier payments against your ledgers in minutes.