If you sell or buy anything on credit, two ledgers quietly shape the health of your business every day: accounts payable and accounts receivable. Understanding “accounts payable vs accounts receivable” is part of the fundamentals of accounting because together they describe money leaving and entering the company, determine liquidity on the balance sheet, and influence whether you can seize opportunities without running short on cash. This guide explains what each term means, how the accounts payable process and the accounts receivable processes work, which metrics to watch, and how to tighten both sides to improve cash flow and working capital—without drowning your team in spreadsheets.

What is accounts payable (AP)?

Accounts payable (often shortened to “accounts payable AP”) is the amount you owe suppliers and creditors for goods or services you’ve already received. AP is a current liability on the balance sheet. When a vendor sends an invoice with defined payment terms (for example, net 30), your finance team records a bill in the general ledger and schedules it for payment by the due date. Paying on time protects vendor relationships; paying strategically (sometimes earlier to earn a discount for early payment) can lower costs and sharpen cash forecasting. .

The accounts payable process typically follows five steps: .

1. Capture the invoice. This is where optical character recognition (OCR) in modern accounting software helps reduce manual entry.
2. Match and verify. For purchases tied to a purchase order, many teams perform two- or three-way matching (invoice, purchase order, and receiving document) to confirm quantities, prices, and that goods or services were received.
3. Approve. The right approver signs off based on policy or dollar thresholds.
4. Schedule and pay. Payment is queued for the agreed due date using ACH, virtual card, check, or wire.
5. Reconcile. The payment is posted back to the general ledger and vendor statements are reconciled.

AP example: You order $5,000 of packaging from a supplier on net-30 terms. When the invoice arrives, AP records a $5,000 credit to accounts payable and a $5,000 debit to inventory or expense (depending on your policy). When you pay on the 30th day, AP debits accounts payable and credits cash.

What is accounts receivable (AR)?

Accounts receivable (often “accounts receivable AR”) is money owed to you by customers for goods or services delivered on credit. AR is a current asset on the balance sheet because you expect to collect it within a year. The accounts receivable and accounts payable sides are symmetrical: every invoice you send is AR to you and AP to your customer. .

A practical accounts receivable process looks like this:

1. Invoice quickly and clearly. Issue invoices immediately when goods ship or services are delivered, with crystal-clear payment terms and a conspicuous due date.
2. Record the receivable. Debit accounts receivable and credit revenue in the general ledger.
3. Remind and collect. Use automated reminders as the due date approaches and after it passes. Offer convenient payment options to accelerate cash.
4. Apply cash. When a customer pays, credit accounts receivable and debit cash.
5. Review aging. Analyze the AR aging report to spot slow-pay risks and escalate outreach.

AR example: You deliver a $12,000 software setup on net-30 terms. On invoicing, you debit AR $12,000 and credit revenue $12,000. When the customer pays on day 28, you credit AR and debit cash.

Why the difference matters (and how AP and AR connect)

• Classification: AP is a liability; AR is an asset. That distinction directly affects ratios that lenders, partners, and investors watch—especially the current ratio and working capital.
• Cash flow direction: Payables represent cash outflow in the near term; receivables represent future cash inflow. Managing both sides in tandem helps prevent crunches.
• Risk and control: Segregation of duties reduces fraud risk—don’t let the same person enter vendor bills and approve payments, or record customer collections and reconcile the bank.
• One transaction, two views: For any sale on credit, one balance goes up in AR for the seller while the buyer’s AP balance rises by the same amount. This symmetry makes clean reconciliations possible.

Key metrics to manage payables and receivables

• Days Payable Outstanding (DPO): Average days you take to pay suppliers. A thoughtfully higher DPO preserves cash without straining relationships.
• Days Sales Outstanding (DSO): Average days customers take to pay you. A lower DSO speeds cash collection.
• AR Turnover: Net credit sales divided by average accounts receivable. Higher is better—cash converts faster.
• AP Cost per Invoice: Total AP costs divided by invoice volume. Automation typically lowers this.
• % of Invoices Captured Electronically: The higher this is, the fewer errors and less rework.
• Dispute Cycle Time: Days to resolve a pricing/quantity dispute. Faster resolution equals happier vendors and customers.

Payment terms that protect cash flow

Payment terms are the “rules of engagement” that link AP and AR. Consider:

• Net-15, Net-30, Net-45, or Net-60: Choose terms that fit your sales cycle, industry norms, and bargaining power.
• 2/10, Net-30 (a classic discount for early payment): The buyer gets a 2% discount if they pay within 10 days; otherwise, the full amount is due in 30 days. Taking this discount can be an excellent, low-risk “return” on cash if you have the liquidity.
• Milestones and deposits: For large or custom orders, deposits reduce risk and improve working capital for the seller while still giving the buyer breathing room.
• Late-fee policies: Clear policies reduce awkward conversations and encourage timely payment—be sure they’re lawful in your jurisdiction and reasonable for long-term relationships.

How to tighten the accounts payable process

1. Standardize intake. Require all vendor invoices to include a purchase order number and send them to one email inbox. Accounting software can auto-route by vendor or department.
2. Use OCR and rules. Automated data capture cuts keying errors; rules flag mismatches in quantities or unit prices before approval.
3. Enforce approval workflows. Segregate duties: requesters cannot approve their own spend; approvers can’t release payments.
4. Optimize payment runs. Batch payments to meet due dates without going late. Where feasible, negotiate virtual card or ACH for predictable timing and potential rebates.
5. Watch vendor terms and seasonal patterns. If you sell more in Q4, it might be worth negotiating extended terms with suppliers leading into that period; conversely, commit to early-pay on critical items to secure supply.
6. Reconcile proactively. Monthly vendor statement reconciliations catch missing credits and duplicate invoices before they bite cash flow.

How to strengthen the accounts receivable process

1. Invoice design matters. Prominent due date, how to pay, and who to contact for disputes reduce friction and speed payment.
2. Automate reminders. Gentle nudges a few days before due, on the due date, and after the due date lower DSO without eating team time.
3. Segment customers. Offer tighter terms to slow payers and consider small discounts to great payers who consistently remit early.
4. Expand payment options. Let customers pay via bank transfer, card, or online portal. Convenience improves conversion rates.
5. Track disputes and root causes. If “wrong price” or “missing PO” dominates, fix upstream quoting or purchase-order practices.
6. Review credit regularly. Tie credit limits to size, payment history, and seasonality to reduce write-offs.

Where AP and AR show up in your financial statements

• Balance sheet: AR appears under current assets; AP appears under current liabilities. Movements in each change working capital and influence your current ratio.
• Income statement: Discounts taken for early payment (on the AP side) reduce expense; late-fee income (on the AR side) increases other income.
• Cash flow statement: Collections from AR lift operating cash flow; payments to suppliers reduce it. Watching these inflows and outflows by month clarifies trends you might miss in accrual reports.

Internal controls you shouldn’t skip

• Segregation of duties: Separate creating vendors from approving payments; separate invoicing from cash application.
• Vendor master hygiene: Create vendors only with tax IDs and verified banking details; prevent duplicates.
• Positive pay and dual authorization: Bank tools that require pre-approved check files and two approvers for large payments prevent costly errors.
• Documented policies: Write down thresholds for POs, who approves what, and how exceptions are handled. Consistency is a quiet superpower.

Technology and automation to consider

• Accounting software with strong AP/AR modules centralizes the general ledger, vendor/customer records, and audit trails.
• OCR and three-way matching reduce manual keying and catch mismatches on price or quantity before approval.
• Customer portals and online payment links shorten the leap from “invoice received” to “invoice paid.”
• Dashboards for DSO, DPO, aging, and exception rates make it obvious where to act next.

Practical examples that bring AP and AR to life

• The early-payment discount decision: Suppose a vendor offers 2/10, net-30 on a $20,000 invoice. Paying on day 10 saves $400. If you have the cash, the implied annualized return is often far higher than leaving money idle. On the flip side, if your customer offers to pay you 2% early, consider whether the discount is worth the lower DSO and reduced risk.
• The purchase order safeguard: Requiring a purchase order for every spend over, say, $1,000 keeps “surprise invoices” from stacking up in AP and strengthens budget discipline.
• The AR “first 48 hours” rule: The probability of prompt payment rises significantly when an invoice is accurate and arrives immediately after delivery. Build the habit of issuing invoices the same day goods or services are delivered.

Common pitfalls—and how to avoid them

• Mixing AP and AR duties in one role. It’s tempting in very small teams, but it complicates audits and increases risk. Split duties as soon as possible.
• Sloppy vendor onboarding. Incomplete tax forms or bank details delay payments, sour relationships, and can even enable fraud.
• Invoices without POs. Skipping purchase orders may seem faster, but it creates approval confusion and slows both AP and monthly close.
• “Set and forget” credit terms. Customer health changes; revisit credit limits and terms at least twice a year.
• Ignoring small balances. Old $50 and $100 balances clog the AR aging and hide bigger issues. Clear them out monthly with write-offs according to policy.

AP and AR policies for fast-growing teams

As volume grows, tighten policy clarity:

• When to require a purchase order (by spend threshold or vendor category).
• Approval tiers by amount and department, with backups to prevent delays.
• Standard payment terms by vendor type (e.g., software, inventory, contractors).
• Preferred payment rails (ACH first, then virtual card, then wire) and when to use each.
• Customer credit policy (how to set limits, when to require deposits, when to hold shipments).
• Collections playbook stages (friendly reminder → firm reminder → phone call → payment plan → collections).

How AP and AR affect working capital strategy

Working capital is current assets minus current liabilities. Because AR increases current assets and AP increases current liabilities, small changes in DSO and DPO can meaningfully change your cash runway. A balanced approach is best:

• Pull DSO down by invoicing immediately, offering convenient payments, and automating reminders.
• Avoid pushing DPO so high that you miss discounts, rack up late fees, or strain critical suppliers.
• Forecast both. Pair your sales pipeline with AR aging and your purchasing plan with AP due dates to project cash needs at least 13 weeks ahead.

Frequently asked questions

Is invoicing part of AP or AR?
Issuing invoices is part of AR; receiving and paying vendor invoices is AP.

Should the same person handle AP and AR?
Avoid it whenever possible. Segregation of duties is a cornerstone internal control that reduces error and fraud risk.

Are cash sales part of AR?
No. AR tracks credit sales—cash sales skip the receivable and go straight to cash.

Can AP include payroll or long-term debt?
Payroll is usually managed separately. Long-term debt sits outside AP; AP focuses on short-term obligations to suppliers.

How Ledgeroo can help you master AP and AR concepts

If you’re building up your finance skills or training a team, the fastest way to internalize concepts like accounts payable vs accounts receivable is through consistent, focused practice. Ledgeroo delivers bite-sized lessons that walk through the fundamentals of accounting step by step—definitions, examples, journal entries, key ratios, and short quizzes that reinforce what you learn. Because lessons are compact and practical, you can progress a little each day and build confidence without getting overwhelmed. Whether you’re new to bookkeeping or leveling up for a finance role, this consistent habit compounds fast.

Next steps

1. Map your current processes. Write down how invoices arrive, how they’re approved, how you collect from customers, and who touches each step.
2. Pick one win on each side. For AP, implement a single intake inbox and auto-coding rules. For AR, add payment links to every invoice and schedule automated reminders.
3. Track one metric per side for 90 days. DPO for AP, DSO for AR. Watch the trend and adjust.
4. Keep learning. A few minutes a day with Ledgeroo’s bite-sized lessons will cement the fundamentals of accounting and help you translate ideas into cleaner processes and stronger cash flow