Accounts payable and accounts receivable side by side
They are the two sides of trade credit. Payables are what you owe suppliers; receivables are what customers owe you.
| Accounts payable (AP) | Accounts receivable (AR) | |
|---|---|---|
| What it is | Money you owe suppliers | Money customers owe you |
| Balance sheet | Current liability | Current asset |
| Normal balance | Credit | Debit |
| Created by | A supplier bill for goods or services bought on credit | A customer invoice for goods or services sold on credit |
| Cleared by | Paying the supplier | Collecting from the customer |
| Key measure | Days payable outstanding (DPO) | Days sales outstanding (DSO) |
| Main report | AP aging by vendor | AR aging by customer |
| Main risk | Paying twice, paying a fraudster, paying late | Customers paying late or not at all |
Journal entries for payables and receivables
A supplier bill credits accounts payable and paying it debits AP. A customer invoice debits accounts receivable and collecting it credits AR.
| Event | Debit | Credit |
|---|---|---|
| You receive a supplier bill for $5,000 of materials | Inventory or expense $5,000 | Accounts payable $5,000 |
| You pay the supplier | Accounts payable $5,000 | Cash $5,000 |
| You invoice a customer $5,000 | Accounts receivable $5,000 | Revenue $5,000 |
| The customer pays you | Cash $5,000 | Accounts receivable $5,000 |
One invoice, two sides
When Supplier Co invoices Buyer Inc $5,000 on net 30 terms, the same document is a receivable for Supplier Co and a payable for Buyer Inc until Buyer Inc pays.
On day 1 Supplier Co records $5,000 of accounts receivable and Buyer Inc records $5,000 of accounts payable. On day 30 Buyer Inc pays; both balances go to zero and cash moves from one bank account to the other. If Buyer Inc pays on day 45, its DPO rises and Supplier Co’s DSO rises by the same 15 days for that invoice.
How AP and AR affect cash
Collecting receivables faster and paying payables on their due date, rather than early, both leave more cash in the business.
The cash conversion cycle is days inventory outstanding plus days sales outstanding minus days payable outstanding. Lowering DSO and holding DPO at your agreed terms both shorten it. Paying suppliers late to raise DPO is a false economy: it costs discounts, late fees and goodwill. See days payable outstanding.
Accounts payable vs accrued expenses
Accounts payable is billed; accrued expenses are incurred but not yet billed. At month-end, goods received without an invoice are accrued, then reversed when the bill arrives and is entered in AP.
Frequently asked questions
Is accounts payable an asset or a liability?
A liability. Accounts payable is money the business owes, usually due within a year, so it sits under current liabilities on the balance sheet. Accounts receivable is the asset.
Is accounts payable a debit or a credit?
Accounts payable normally has a credit balance. Recording a supplier bill credits accounts payable; paying it debits accounts payable and credits cash. Accounts receivable normally has a debit balance.
What is the difference between accrued expenses and accounts payable?
Accounts payable is for costs you have been billed for. Accrued expenses are costs you have incurred but not yet been invoiced for at the period end, such as goods received without an invoice or wages earned but not yet paid. Both are current liabilities.
How do receivables and payables affect cash flow?
An increase in accounts receivable uses cash (you have sold but not collected); an increase in accounts payable frees cash (you have bought but not paid). In the cash flow statement’s indirect method, a rise in AP is added back and a rise in AR is subtracted.
Who manages accounts payable and accounts receivable?
In small businesses one bookkeeper often does both. As a company grows they split: AP clerks process supplier invoices and payments, AR or credit staff invoice customers and chase collections, and the controller reconciles both to the general ledger.
Automate matching, approvals and exception handling
Aequo AP captures invoices, matches them to purchase orders and receipts, routes approvals and flags duplicates and exceptions, then syncs with QuickBooks Online, Xero, FreshBooks, Zoho Books or Business Central.