Accounts Payable vs Accounts Receivable Explained
Accounts payable vs accounts receivable: key differences, journal entries, a side-by-side example, DSO and DPO, and how both affect small business cash flow.
Quick answer: Accounts receivable (AR) is money owed to your business by customers you have invoiced. Accounts payable (AP) is money your business owes to suppliers whose bills you haven't paid yet. AR is an asset and AP is a liability on the balance sheet. The same invoice is a receivable for the seller and a payable for the buyer.
Accounts payable vs accounts receivable is one of the first distinctions anyone doing their own books has to get straight, and mixing them up leads to wrong balance sheets and bad cash decisions. This guide explains both side by side, with journal entries, a worked example and the metrics that tie them to cash flow. If you are on the receivables side, start with clear, numbered invoices from our free invoice generator.
Accounts payable vs accounts receivable: side by side
| Accounts receivable (AR) | Accounts payable (AP) | |
|---|---|---|
| What it is | Money customers owe you | Money you owe suppliers |
| Created by | Your sales invoice | A supplier's bill (their invoice) |
| Balance sheet | Current asset | Current liability |
| Normal balance | Debit | Credit |
| Goal | Collect quickly | Pay on time, not early unless rewarded |
| Key metric | Days sales outstanding (DSO) | Days payable outstanding (DPO) |
| Key report | AR aging report | AP aging report |
| Main risks | Late payment, bad debt | Late fees, fraud, duplicate payments |
| Supporting document from the other side | Customer's remittance advice | Your remittance advice to the supplier |
What is accounts receivable?
When you deliver work and send an invoice with payment terms, you have earned the money but not yet received it. That unpaid amount sits in accounts receivable until the customer pays. AR is an asset because it is a claim on future cash. Our full guide to accounts receivable covers the process in depth, and the AR aging report guide shows how to see which customers are late.
What is accounts payable?
When a supplier delivers goods or services and sends you a bill with terms, you owe the money but haven't paid it. That amount sits in accounts payable until you pay. AP is a liability because it is an obligation to pay cash in the future. What you call a "bill" is simply your supplier's invoice; see invoice vs bill for the terminology.
Journal entries for AR and AP
Under accrual accounting, both are recorded when the invoice or bill is issued, not when cash moves.
Accounts receivable entries
| Event | Debit | Credit |
|---|---|---|
| You invoice a client $5,000 | Accounts receivable $5,000 | Sales revenue $5,000 |
| The client pays $5,000 | Cash $5,000 | Accounts receivable $5,000 |
Accounts payable entries
| Event | Debit | Credit |
|---|---|---|
| You receive a $2,000 bill for materials | Inventory or expense $2,000 | Accounts payable $2,000 |
| You pay the $2,000 bill | Accounts payable $2,000 | Cash $2,000 |
Revenue is recognized when you invoice and the expense when you receive the bill. Cash only changes when money is paid. If these entries are new to you, our bookkeeping basics guide explains debits and credits step by step.
Worked example: one month of AR and AP
A small signage business starts October with $12,000 of receivables and $6,500 of payables. During the month:
| Transaction | AR | AP | Cash |
|---|---|---|---|
| Opening balance | $12,000 | $6,500 | $9,000 |
| Invoices sent to customers | +$30,000 | ||
| Customer payments received | −$26,000 | +$26,000 | |
| Supplier bills received | +$14,000 | ||
| Supplier bills paid | −$12,500 | −$12,500 | |
| Wages and rent paid in cash | −$11,000 | ||
| Closing balance | $16,000 | $8,000 | $11,500 |
The maths: AR $12,000 + $30,000 − $26,000 = $16,000; AP $6,500 + $14,000 − $12,500 = $8,000; cash $9,000 + $26,000 − $12,500 − $11,000 = $11,500.
The business invoiced $30,000 but collected $26,000, so receivables grew by $4,000. If that keeps happening, profit can look healthy while the bank balance gets squeezed. That is the link to cash flow management.
DSO and DPO: measuring both sides
Days sales outstanding (receivables)
DSO = Accounts receivable ÷ Credit sales × Days. Using the example: $16,000 ÷ $30,000 × 31 = 16.5 days. Our guide to days sales outstanding covers the variations and how to lower it.
Days payable outstanding (payables)
DPO = Accounts payable ÷ Purchases (or cost of goods sold) × Days. Using the example: $8,000 ÷ $14,000 × 31 = 17.7 days.
Putting them together
For businesses with inventory, the cash conversion cycle is days inventory outstanding + DSO − DPO. If a business holds stock for 25 days, collects in 40 and pays suppliers in 30, its cycle is 25 + 40 − 30 = 35 days: it has to fund 35 days of operations from its own cash. A service business with no inventory and a DSO of 40 and DPO of 30 is funding a 10-day gap. Shortening DSO or, where suppliers agree, lengthening DPO narrows it.
Managing accounts receivable well
- Invoice immediately on delivery, with a clear due date and payment details.
- Agree payment terms before work starts.
- Send reminders before and after the due date.
- Review the aging report weekly and chase the oldest balances first.
- Ask customers to send a remittance advice so payments can be matched.
- Consider deposits, milestone billing or invoice factoring if slow payers strain cash.
Managing accounts payable well
- Match before paying. Check each bill against the purchase order and delivery note (the "three-way match"). A purchase order template makes this easier.
- Pay on the due date, not before, unless an early payment discount is worth more than holding the cash.
- Avoid duplicate payments by recording each supplier invoice number once.
- Verify bank detail changes by phone using a number you already have. Fake supplier invoices and changed bank details are a common fraud; see our guide to invoice scams.
- Separate duties where you can: the person who approves bills shouldn't be the only person who can release payments.
AP and AR in a small business: who handles what
In a larger company, accounts payable and accounts receivable are separate teams. In a small business they are often the same person, sometimes the owner, which is exactly why it helps to keep the two processes visibly separate.
- Receivables tasks: raising invoices, sending statements, chasing overdue payments, applying customer payments to the right invoices and following up on short payments.
- Payables tasks: receiving and checking supplier bills, getting approval, scheduling payments, sending remittance advice and keeping supplier bank details up to date.
Even as a one-person business, use separate folders or tabs for "invoices out" and "bills in", and give each a status column (open, part-paid, paid). That one habit prevents the most common mix-ups.
Common mistakes when mixing up AP and AR
- Recording a customer payment as income twice. Under accrual accounting, revenue was recorded when you invoiced. When the payment arrives, it clears accounts receivable; it is not new income.
- Recording a supplier bill as paid when it is only approved. Approval does not move cash. Leave it in accounts payable until the money leaves your account.
- Netting off a customer who is also a supplier. If you both buy from and sell to the same business, keep the invoice and the bill separate unless you have a written agreement to offset them, and record any offset explicitly.
- Treating a credit note as a payment. A credit note you issue reduces a receivable; a credit note you receive reduces a payable. Neither is cash. See our guide to debit notes and credit notes.
- Ignoring small unpaid balances. A few dollars short on several invoices adds up and makes both aging reports harder to trust.
Where AP and AR appear on financial statements
Both appear on the balance sheet under current items, AR in current assets and AP in current liabilities. Neither appears on the income statement directly; the income statement shows the revenue and expenses that created them. Changes in AR and AP do appear on the cash flow statement: an increase in AR reduces operating cash flow, and an increase in AP increases it, because you have held on to cash you owe.
Current assets minus current liabilities is working capital. In the example above, ignoring other items, $16,000 AR + $11,500 cash − $8,000 AP = $19,500 of working capital.
Next step
List every unpaid customer invoice and every unpaid supplier bill on two tabs of one spreadsheet, with amounts and due dates. Total each, then compare: if receivables are growing faster than sales, focus on collections first, and make sure new invoices go out the day work is done using a clear layout such as the corporate invoice template.
Frequently asked questions
What is the difference between accounts payable and accounts receivable?
Accounts receivable is money customers owe you for goods or services you have delivered and invoiced. Accounts payable is money you owe suppliers for goods or services you have received but not yet paid for. Receivables are an asset on the balance sheet; payables are a liability.
Is accounts receivable a debit or a credit?
Accounts receivable is an asset, so it increases with a debit and decreases with a credit. When you invoice a customer you debit accounts receivable and credit sales; when they pay you debit cash and credit accounts receivable.
Is accounts payable an expense?
No. Accounts payable is a liability that records an amount you owe. The related expense or inventory is recorded separately when you receive the supplier's bill. Paying the bill reduces accounts payable and cash, but does not create a new expense.
Can the same invoice be both accounts payable and accounts receivable?
Yes, from different sides. When you send an invoice it is a receivable in your books and a payable in your customer's books. When the customer pays, it is cleared from both.
Do small businesses on cash accounting have accounts payable and receivable?
In the formal books, not usually, because cash accounting records income and expenses only when money moves. In practice you still need to track unpaid invoices and unpaid bills, even if only in a spreadsheet, so you know who owes you and what you owe.
What is the difference between accounts receivable and notes receivable?
Accounts receivable are informal amounts owed on normal credit terms, usually backed only by your invoice. Notes receivable are backed by a written promissory note that sets out a repayment schedule and often interest. If a slow-paying client signs a formal payment plan, the balance may move from accounts receivable to notes receivable, and any portion due after twelve months may be shown as non-current.
What is the difference between accounts payable and accrued expenses?
Accounts payable are amounts you owe on supplier bills you have already received. Accrued expenses are costs you have incurred but not yet been billed for, such as wages earned but unpaid, or utilities used before the bill arrives. Both are current liabilities under accrual accounting, but accruals are often estimates recorded at period end, while payables are backed by an actual invoice.
Is a customer deposit accounts receivable?
No. When a customer pays a deposit before you do the work, you have received cash you have not yet earned, so it is a liability, often called customer deposits or unearned revenue. It becomes revenue as you deliver. Receivables are amounts customers owe you after you have invoiced and earned them. How an unpaid deposit invoice is recorded depends on your accounting policy, so ask your accountant.
Is a high accounts payable balance bad?
Not necessarily. A large payables balance can simply mean you use normal credit terms well, or that you are buying more because sales are growing. It becomes a warning sign when bills are past due, suppliers are chasing you, or payables grow much faster than purchases. Compare your DPO with your suppliers' terms: paying on time is healthy, but stretching beyond terms can lead to late fees and damaged relationships.
Is payroll part of accounts payable?
Usually not. Wages owed to employees are normally recorded in a separate liability account, such as wages payable or accrued payroll, along with payroll taxes and withholdings owed to tax authorities. Accounts payable is generally kept for supplier and vendor bills. Contractors who invoice you are the exception: their invoices go through accounts payable like any other supplier bill.
Invoice Creator Editorial Team
Guides on invoicing, cash flow and small-business finance from Invoice Creator, operated by Next Software Development Company. Content is reviewed for accuracy against the fields our own invoice generator produces.
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