Accounts payable vs accounts receivable: the differences, with examples
For finance managers, founders and anyone learning the books: how AP and AR differ, how each is recorded, the metrics that track them, and how they work together in cash flow.
Key takeaways
- Accounts payable (AP) is money your business owes suppliers for goods and services received on credit. It's a current liability.
- Accounts receivable (AR) is money customers owe your business for goods and services delivered on credit. It's a current asset.
- Every credit sale creates both: the seller's receivable is the buyer's payable, for the same amount.
- AP is tracked with days payable outstanding (DPO); AR with days sales outstanding (DSO). Together with inventory days, they make up the cash conversion cycle.
- Keep AP and AR duties separate and automate the document work: supplier invoices on the AP side, remittances and checks on the AR side.
On this page
Accounts payable (AP) is the money a business owes its suppliers for goods and services it received on credit, recorded as a current liability. Accounts receivable (AR) is the money customers owe the business for goods and services it delivered on credit, recorded as a current asset. They're two sides of the same transaction: when one company sells on credit, its receivable is the buyer's payable.
This guide compares AP and AR side by side, shows how each is recorded with an example, covers the metrics for each and explains how they work together in cash flow.
Accounts payable vs accounts receivable at a glance#
| Accounts payable | Accounts receivable | |
|---|---|---|
| Definition | Money you owe suppliers | Money customers owe you |
| Balance sheet | Current liability | Current asset |
| Normal balance | Credit | Debit |
| Created by | A supplier's invoice for a credit purchase | Your invoice for a credit sale |
| Cash effect when settled | Cash goes out | Cash comes in |
| Key metric | Days payable outstanding (DPO) | Days sales outstanding (DSO) |
| Main risk | Late payment, duplicate or fraudulent payment | Late or no payment (bad debt) |
| Team | Accounts payable | Accounts receivable, credit and collections |
One transaction, two sides#
A bakery orders $10,000 of flour and sugar from a food distributor on net 30 terms.
The bakery (buyer) records accounts payable:
| When | Debit | Credit |
|---|---|---|
| Invoice received | Inventory $10,000 | Accounts payable $10,000 |
| Invoice paid (day 30) | Accounts payable $10,000 | Cash $10,000 |
The distributor (seller) records accounts receivable:
| When | Debit | Credit |
|---|---|---|
| Invoice sent | Accounts receivable $10,000 | Sales revenue $10,000 |
| Payment received (day 30) | Cash $10,000 | Accounts receivable $10,000 |
Same amount, same dates, opposite sides.
What accounts payable involves#
AP receives supplier invoices, checks them against purchase orders and receipts, gets them approved, pays them on terms and keeps the vendor master accurate. The main risks are paying late, paying twice and paying fraudulent invoices. See what is accounts payable.
What accounts receivable involves#
AR issues invoices, sets credit terms, follows up on overdue balances, applies incoming payments to the right invoices (cash application) and estimates bad debts through an allowance for doubtful accounts. The main risk is customers paying late or not at all. See accounts receivable automation.
The metrics: DPO and DSO#
DPO = 365 ÷ (Credit purchases ÷ Average accounts payable)
DSO = 365 ÷ (Credit sales ÷ Average accounts receivable)
If the distributor above has credit sales of $2,400,000 a year and average receivables of $260,000, its AR turnover is about 9.2 and its DSO is about 40 days. See how to calculate accounts payable for the AP side worked through.
How they work together: the cash conversion cycle
Cash conversion cycle = Days inventory outstanding + DSO − DPO
The shorter the cycle, the less cash the business ties up in operations. Collecting faster (lower DSO) and paying on terms rather than early (higher DPO, within reason) both shorten it. Stretching suppliers past terms isn't a fix: it damages relationships and can cost you discounts.
Keeping AP and AR under control#
- Separate duties. Different people should record receivables, approve payables and release payments.
- Reconcile regularly. Tie the AP and AR subledgers to the general ledger every month, and reconcile supplier and customer statements.
- Watch aging reports. Overdue receivables and unpaid payables both need attention.
- Automate the document work. On the AP side, invoice extraction and accounts payable automation capture, validate and route supplier invoices. On the AR side, reading checks and remittance advice speeds up cash application; see check deposit operations.
Docsumo extracts invoices, remittances, checks and 250+ other document types with 99% field-level accuracy and sends the data to your ERP through integrations.
The bottom line#
Accounts payable is what you owe; accounts receivable is what you're owed. One is a liability, the other an asset, and every credit sale creates both on opposite sets of books. Track them with DPO and DSO, manage them together through the cash conversion cycle, and keep the duties separate.
Frequently asked questions#
What is the main difference between accounts payable and accounts receivable?
Accounts payable is what you owe to suppliers, recorded as a liability. Accounts receivable is what customers owe you, recorded as an asset.
Is accounts receivable a debit or a credit?
Accounts receivable has a normal debit balance; it increases with a debit when you invoice a customer. Accounts payable has a normal credit balance; it increases with a credit when you record a supplier invoice.
Can AP and AR be netted against each other?
Only in specific cases, such as a legal right of offset with the same party. Normally they're shown separately on the balance sheet.
Which is better, high AP or high AR?
Neither on its own. High AR means cash is tied up with customers; high AP means you're holding suppliers' cash longer. What matters is collecting on time and paying on terms.
Should the same person handle AP and AR?
It's better not to. Separating the people who record and collect receivables from those who approve and pay bills reduces the risk of fraud and errors.