Accounts Payable vs Accounts Receivable

Salt and sugar. Day and night. Push and pull. Chalk and cheese.Total opposites.

Business has its own version of opposites, too. They’re called Accounts Payable and Accounts Receivable. They’re the yin and yang of money. Two sides of the same coin.

When they’re in balance, business flows. Growth feels possible. People get paid. 

But when they’re not, that’s when the cracks start to show. Cash gets tight. Credit takes a hit. 

So today we're going to speak about these two terms in more detail. We'll discuss what accounts payable and accounts receivable are, the accounts receivable process and the account payable process. 

You’ll see exactly how they work together, and why managing them well can help secure your company's financial health.

What is accounts payable?

First, let's get clear on what accounts payable means. Because if you’re running a business - or planning to - you need to know this stuff. So, here’s the simplest way to think about it:

Definition and balance sheet classification

Accounts Payable (or just AP for short) is the money your business still owes. It’s the unpaid bills. The invoices you’ve received, but haven’t paid yet.

You bought something, maybe supplies, maybe services, but you haven’t handed over the cash … yet.

It’s kind of like when you go out to eat, and the check comes at the end. You’ve already enjoyed the meal, but now you need to pay.

In business, this happens all the time. Companies buy on credit constantly. It’s normal. It keeps operations moving.

On the balance sheet, AP lives under a section called current liabilities. This is because these are short-term debts. Stuff that usually needs to be paid in 30, 45, 60, or maybe 90 days, depending on the deal. So if you look at your balance sheet and see “Accounts Payable” listed, that’s your to-do list. Those are the bills you still owe.

Now, if the number of AP you owe is going up, it could mean two things.

1) On the positive side, it might show that your company is using vendor credit wisely, stretching out payments to free up cash for other opportunities.

2) But, a growing pile of payables can also be a warning sign. It might mean the business is struggling to pay on time because the cash just isn’t there.

How AP works – process simplified

The AP process is actually pretty straightforward once you see the steps lined up.

It usually starts with the invoice. A supplier sends a bill for goods or services delivered. That’s step one.

Next, the business records it in the accounts payable ledger. This is where the company officially recognizes, “Okay, we owe this amount.”

Then comes the waiting period. The credit terms we talked about earlier. Maybe it’s Net 30, maybe 60 days, maybe there’s a discount for paying early. During this time, the invoice sits on the books as a liability.

Finally, when the payment goes out (by bank transfer, check, card, whatever), the business clears the liability or cash amount. The books get updated, the vendor gets their money, and everyone’s happy.

So in short:

Invoice receipt → record AP → payment made → clear liability account.

Common AP examples

What actually counts as accounts payable, you ask? Here's where you might see this in your retail or hospitality business operations:

• Supplier invoices: Say a company orders raw materials or stock on credit. Until the bill is paid, that’s AP.
• Contractor payments: Maybe you bring in outside help, like an IT specialist, or even a cleaning crew. Their invoices sit in AP until you pay them.
• Subscription services: Think software platforms like a POS system or other subscriptions you use month to month. They provide the service first, then bill you.
• Utility bills: Electricity, water, internet, phones. These are all classic AP, because you use them upfront and settle the bill later.
• Professional services: Lawyers, accountants, consultants are often invoiced quarterly, and all show up in AP.
• Maintenance costs: Upkeep for equipment or facilities, sometimes paid on a semiannual schedule.

Key AP metrics & role in cash flow

A few simple metrics can tell you a lot about how well a business is managing its payables, and, by extension, its cash flow.

• AP turnover: This shows how many times a company pays off its suppliers within a set period, usually a year. A higher turnover means the business is paying quickly. That can be great for supplier relationships. But if it’s too high, it might mean the company isn’t making the most of available credit terms.
• Days Payable Outstanding, or DPO: This measures the average number of days a company takes to pay its bills. A longer DPO can help conserve cash, keeping money in the business for longer. But stretch it too far, and suppliers might lose trust.

Effect on cash outflows: Accounts payable directly shapes how cash leaves the business. Managing payables smartly (timing payments, using early-payment discounts, avoiding late fees) can free up cash to invest in growth or simply keep the lights on.

What is accounts receivable?

Onto our second term, accounts receivable. Let's take a closer look at what this means.

Definition and balance sheet classification

If accounts payable is the money going out, then accounts receivable is the money coming in.

AR is the amount a business is still waiting to collect after delivering a product or service. The work’s been done, the goods are in the customer’s hands, but the payment hasn’t arrived yet. Until it does, that amount shows up on the company’s balance sheet as a current asset in your asset account.

When a business sells on credit, it’s essentially giving the customer a short-term loan. The invoice is the IOU.

Because customers are legally obligated to pay, AR is considered pretty reliable. That’s why it’s recorded as a liquid asset, something a company can even use as collateral if it needs a loan to cover short-term obligations.

So, AR isn’t just money owed. It’s an essential part of working capital. Managed well, it fuels the business with steady cash inflows, keeps operations moving, and builds trust with customers.

How AR works

The AR process is just as straightforward as AP, but in reverse.

It starts when the business delivers a product or service and sends the invoice to the customer. The business records it in the accounts receivable ledger. At this point, the money is owed, but it hasn’t been collected yet.

Then comes the waiting period. During this time, the invoice is listed as AR, waiting to be paid.

Finally, when the customer settles the bill, the business receives the payment and records the cash inflow. The receivable is cleared, and the money officially becomes part of the company’s cash balance.

Here's the steps simplified:

Invoice sent → record AR → payment received → cash inflow recorded.

AR examples and working capital impact

Say you own a hotel that hosts corporate clients.

You provide rooms, meals, event spaces, and then send an invoice at the end of the month.

Until the payment arrives, that amount is recorded as accounts receivable on your company’s balance sheet as a current asset.

A lot of hotels and some restaurants operate this way, especially with frequent or corporate clients. Instead of paying for every stay or meal on the spot, clients get a short credit period to settle their bills. Other hospitality businesses might extend the same terms to all clients. During this time, the hotel’s cash flow is technically delayed, but the receivable accounts are assets that contribute to working capital.

Cash flow metrics & collection challenges

Managing accounts receivable is all about keeping cash flowing and spotting issues early. Here are the key metrics to track:

• Days Sales Outstanding (DSO): Average number of days it takes to collect payment after a sale. Lower DSO = faster cash inflow.
• Late payments: Percentage of invoices not paid by the due date. High numbers can signal cash flow trouble.
• Collection effectiveness: Measures how efficiently overdue invoices are recovered. Helps identify gaps in the process.
• Average payment period: The typical time clients take to pay. Helps plan cash needs and staffing.

Key differences between AP and AR

We've explained what they are, but here's more on accounts payable vs accounts receivable:

Side-by-Side comparison table

Shared elements

At their core, they share some important elements.

Both are ledger entries on your company’s balance sheet.

Both give you visibility into your financial health.

They tell the story of money coming in and going out, which is essential for cash flow management.

Risks & imbalances

If accounts payable gets too high, it can signal liquidity risk. That’s money you owe piling up in your accounts payable account, potentially putting a strain on your cash account.

On the other, if accounts receivable climbs too high, it may indicate collection issues. Maybe invoices are overdue, late payments are piling up, or your accounts receivable process isn’t working efficiently.

With this in mind, keeping an eye on both payable and accounts receivable is super important. Track your company’s accounts payable, record accounts receivable accurately, and reconcile payments regularly. When invoice processing and accounts receivable automation work together, your financial statements reflect reality, working capital stays healthy, and your company money keeps flowing.

AP and AR within accounting standards & internal controls

So far, we’ve talked about what Accounts Payable and Accounts Receivable are. Now let’s talk about how they fit into the bigger picture, the official rules of accounting, and the systems that keep a business honest and healthy.

Because behind every invoice and every payment there’s a standard, a structure.  Most businesses don’t just make up their financials as they go. (At least, they shouldn’t.) They follow a system:

Accrual accounting

Accounts payable is treated as an accrual. That means expenses are recognized when they happen, not just when cash leaves the cash account. It follows the matching principle, pairing the expense with the revenue it helps generate.

Accounts receivable is recorded as a current asset on the company’s balance sheet, showing money the business expects to collect.

Separation of duties & audit safeguards

For good cash flow management and strong financial health, it’s best when different people handle the accounts payable process and the accounts receivable process. 

This is called separation of duties, and it protects the business from mistakes or fraud. 

Managing and optimizing AP & AR processes

Reconciliation techniques

Have you ever looked at your bank account and thought, “Wait a minute… something’s not adding up here?”

Now imagine that happening at a company. With hundreds, maybe thousands, of payments flying in and out every day. That confusion? That mess? That’s what businesses face when they don’t reconcile their payments.

This just means checking that the money you think came in actually came in, and the money you think went out really went out. 

When you reconcile payments often, your accounts payable account and receivable accounts stay accurate. It also makes your financial statements cleaner and easier to trust.

Early payment discounts & penalties

Sometimes, if you pay a bill early, before the due date, the supplier gives you a discount.

And that little thank you? It adds up. Saving just 2% on every invoice might not sound like much, but across hundreds of payments, that’s real money.

But what if you don’t pay on time? That’s when the trouble starts. You might get hit with late fees. Your supplier might stop giving you good prices, or stop working with you altogether. Suddenly, your cash flow is a mess. You’re always behind, always catching up.

Cash flow forecasting & management

Finally, AP and AR help with cash flow forecasting. By being able to record accounts payable vs accounts receivable, you can predict liquidity, plan your budget, and know when cash is tight or free to invest. Strong accounts receivable automation and a good accounts payable process make this way easier.

Automation of AP and AR

Let’s talk about making life easier with automation.

What is AP & AR automation?

No one starts a business because they love entering invoices. No one gets excited about matching payments to spreadsheets. But if you’ve ever had to do that stuff manually you know how time-consuming (and painful) it can be.

What if software could handle most of that for you? Well, it can. 

Most businesses use accounting software for this. Think of tools like QuickBooks, Xero, Sage, or integrated ERP systems. These platforms all record accounts payable accounts and receivable accounts.

Benefits of automation

Why bother? Well, a few big wins:

• Fewer errors: No more typos or missed invoices in your accounts payable account or receivable accounts.
• Speed: Payments get processed faster, and invoices don’t sit waiting in the system.
• Better audits: Digital records make your financial statements easier to check and trust.
• Improved cash flow: You can see company money moving in and out clearly, helping with cash flow forecasting and cash flow management.

Summary and strategic takeaways

We hope we've cleared up what these two terms mean, why they're polar opposites but still both really important for your business.

Here at Epos Now, our point of sale systems integrate seamlessly with a payment processing service and accounting apps helping you record accounts payable and record accounts receivable effortlessly.

Contact our team of experts to find out how we can help with your accounting and payment processing needs. We'll help make payments painless.

Want to learn more about payments? Check out our other finance guides:

• Payment gateway vs payment processor
• What is a chargeback