Accounts Receivable vs Accounts Payable: What’s the Difference (With Examples)

Managing a company’s finances involves balancing various critical functions, including accounts payable and accounts receivable. Accounts payable encompass the money a company owes to its suppliers for goods and services purchased on credit, representing outgoing funds. Conversely, accounts receivable denote the amounts owed to a company by its customers for sales made on credit, representing incoming funds. Understanding these distinctions and their impact on cash flow and financial stability is crucial for effective financial management.

So, what is the difference between accounts receivable and accounts payable? This blog will walk you through it, along with how to effectively manage accounts receivable and accounts payable. You’ll also learn how to streamline invoice processing, reduce errors, and improve payment efficiency with accounts payable automation.

What Is Accounts Payable (AP)?

Accounts Payable (AP) refers to the money that a business owes to suppliers for goods or services purchased on credit. This liability appears on the company’s balance sheet and represents amounts due to be paid within a specified period, such as 30, 60, or 90 days.

For example, when a company orders raw materials from a supplier and receives an invoice with payment terms like “Net 30,” the business is required to pay the supplier within 30 days. Until that payment is made, the amount is recorded as accounts payable in the company’s financial records.

Accounts payable is an essential function in any organization. A smooth accounts payable process ensures timely payments, better supplier relationships, and improved financial control.

Accounts payable process

The accounts payable process involves multiple steps to ensure proper tracking of outstanding payments and to maintain good supplier relationships. Here’s a quick breakdown of the accounts payable process:

1. Invoice Receipt: The company receives an invoice from the supplier, typically via email or through an online portal.

2. Invoice Verification: The invoice is verified against the purchase order and delivery receipt to confirm the accuracy of the amounts and terms.

3. Approval: After verification, the invoice is forwarded to the relevant departments (e.g., procurement or finance) for approval before payment.

4. Payment Processing: Once approved, the payment is processed according to the payment terms. The accounts payable team ensures that payments are made on time.

The accounts payable process is critical to maintaining smooth operations. For efficient management, businesses can implement accounts payable reporting systems to track and measure KPIs. A comprehensive accounts payable management approach helps mitigate risks and enhance operational efficiency.

Accounts payable example

Let’s say a retail company purchases inventory from a wholesaler. The wholesaler sends an invoice with net-30 terms. The company’s finance team records this as accounts payable in the accounting system, indicating that payment is due in 30 days. During this time, the company tracks the liability until payment is made.

How to record accounts payable

Recording accounts payable accurately is critical to managing liabilities and ensuring proper financial tracking. In the company’s accounting system, an accounts payable entry is made by debiting the relevant expense accounts (e.g., inventory or office supplies) and crediting the accounts payable account.

Example entry:

• Debit: Expense account (e.g., inventory, supplies)
• Credit: Accounts Payable (liability)

Once payment is made, the entry is reversed:

• Debit: Accounts Payable
• Credit: Cash or Bank account

This ensures that the company’s accounts payable are properly recorded, and the payment is reflected accurately.

What is Accounts Receivable (AR)?

Accounts Receivable (AR) represents the outstanding amount owed to your business for goods or services delivered to customers on credit. AR is recorded and listed as a current asset on your balance sheet. The payment time for such accounts ranges from a few days to an entire calendar year.

For instance, when a company sells products to a customer on credit, the amount due from the customer is recorded as accounts receivable until the payment is made. This process helps businesses track the money they are owed and manage cash flow more effectively.

Accounts receivable process

The accounts receivable process involves several steps that ensure timely collection of payments and accurate tracking of what’s owed. Here’s a look at the typical accounts receivable process:

1. Sale or service delivery: The business provides goods or services to the customer, and an invoice is generated with payment terms (e.g., Net 30, 60).

2. Invoice issuance: The company sends an invoice to the customer, detailing the amount due and payment instructions.

3. Payment follow-up: If the payment is not received within the agreed timeframe, reminders or follow-ups may be sent.

4. Cash receipt: Upon receipt of the payment, the accounts receivable account is updated, reducing the outstanding balance.

How to record accounts receivable

Recording accounts receivable is essential for maintaining accurate financial records and ensuring that cash flow is properly tracked. Here’s how it’s typically done:

• Debit: Accounts Receivable (asset)
• Credit: Sales Revenue (income)

Once the payment is received, the company records the following entry:

• Debit: Cash or Bank
• Credit: Accounts Receivable

This accurately reflects the receipt of funds and reduces the outstanding AR balance.

Accounts receivable example

Imagine a software company that sells a subscription to a client. The client receives the product and agrees to pay within 60 days. The company records this amount as accounts receivable in its books. Until payment is received, this amount is tracked and considered an asset on the company’s balance sheet.

What Is the Difference between Accounts Receivable and Accounts Payable?

Accounts Receivable represents money owed to a business by customers for goods or services provided on credit, while Accounts Payable denotes money owed by a business to suppliers or vendors for goods or services received on credit.

Understanding the difference between AR and AP is essential for managing a company’s cash flow effectively. In this section, we’ll take a closer look at the key differences between AR and AP, highlighting how they impact a company’s finances and operations. The following table provides a detailed breakdown of the differences between AP vs AR.

Similarities Between Accounts Payable And Accounts Receivable

Accounts payable (AP) and accounts receivable (AR) are two sides of a company’s financial flow, and while they function differently, they share several similarities. Both are crucial to managing the business’s finances effectively, ensuring smooth transactions with vendors and customers. Understanding these similarities helps businesses streamline their financial processes, improve cash flow management, and maintain accurate records.

Here are some key similarities between AP and AR:

Accounts Payable Vs Accounts Receivable: Example

To further clarify the differences and similarities, let’s take a look at a practical example involving both accounts payable and accounts receivable in a company.

Example: A retail business

Imagine a retail business that sells products to customers and also purchases inventory from suppliers.

1. Accounts payable example
The retail business receives an invoice from a supplier for 100 units of a product, totaling $2,000. The payment terms are net-30, meaning the company has 30 days to pay. The $2,000 is considered an accounts payable because it is money the business owes to the supplier.

2. Accounts receivable example
The same retail business sells 100 units of the same product to a customer, totaling $2,500, with payment terms of net-30. The $2,500 is considered accounts receivable because it is money the business is owed by the customer.

Key points

Accounts payable (AP): Represents liabilities, money the company owes.
Accounts receivable (AR): Represents assets, money the company is owed.

This example demonstrates how both accounts payable and accounts receivable are essential to managing cash flow. Managing these processes effectively helps a business maintain financial stability and optimize its operations.

The Importance of Accounts Payable and Accounts Receivable in Business Finance

Accounts Payable (AP) and Accounts Receivable (AR) are two essential pillars of a company’s financial operations. When managed effectively, they work together to support cash flow, maintain strong relationships with external partners, and guide strategic financial decisions.

Why is accounts payable important?

Accounts Payable represents the money a business owes to its suppliers or vendors. Efficient AP management ensures timely payments, helping maintain liquidity and financial flexibility. Paying invoices on time not only helps manage cash outflows but also builds trust with suppliers, often leading to better payment terms, discounts, and consistent supply quality. Furthermore, AP plays a key role in tracking and managing company expenses, offering insights into spending patterns and areas where costs can be optimized. By keeping AP organized, businesses can avoid late fees, preserve their reputation, and improve vendor relationships.

Why is accounts receivable important?

Accounts Receivable represent the money owed to the business by its customers. AR is crucial for ensuring steady revenue flow and profitability. Timely invoicing and follow-up on payments help avoid revenue disruptions and reduce the chances of unpaid bills impacting your bottom line. Efficient AR management also supports credit control by evaluating customer creditworthiness, reducing the risk of bad debt. Additionally, accurate AR records contribute to tax documentation, financial forecasting, and strategic planning, helping leadership make informed growth decisions.

Balancing AP and AR for Healthy Cash Flow

While AR focuses on bringing money into the business, AP is about managing outgoing payments. Together, they form the backbone of working capital management. A healthy balance between AP and AR allows businesses to meet their financial obligations, avoid unnecessary borrowing, and maintain a strong cash position. This balance supports both short-term operations and long-term financial planning.

Businesses that implement clear, efficient systems to track incoming and outgoing payments are better equipped to maintain consistent cash flow. Whether it’s billing clients promptly or scheduling vendor payments strategically, well-managed AP and AR processes reduce financial risks, improve operational efficiency, and set the stage for sustainable growth.

In short, AP and AR are not just accounting functions—they are strategic tools that impact everything from profitability and cash flow to business reputation and scalability.

Account Receivable vs Accounts Payable: Understanding the Challenges

Dealing with financial matters can present various challenges, particularly when it comes to critical processes like AP and AR. Here are the common challenges that most businesses encounter when dealing with AP and AR functions:

Accounts receivable challenges:

• Poor customer relations with late-paying customers.
• Lack of time to manage the collections process.
• Setting credit limits and conducting periodic credit assessments.
• Collections from bankrupt customers or customers on the verge of bankruptcy.
• Payment resolution tracking and resolution.
• Not having the right tools to manage AR accounts and data.

Accounts payable challenges:

• Lengthy approval timelines and slow processing due to manual paperwork.
• Time-consuming and error-prone manual matching of invoices with purchase orders and goods provided.
• Fraud and theft via e-mail and other scams lead to significant losses.
• Missing invoices that inaccurately depict dues and cash balance.
• Duplicate payments due to a lack of acknowledgement from the supplier or use of multiple payment methods.
• Navigating these challenges is crucial for maintaining effective financial management and ensuring smooth business operations.

How to Effectively Manage Accounts Receivable and Accounts Payable

Effectively managing Accounts Receivable involves timely invoicing, monitoring aging reports to identify overdue accounts, and implementing a robust collection process to minimize bad debts. For Accounts Payable, efficient management includes negotiating favorable payment terms with suppliers, tracking due dates to avoid late fees, and optimizing cash flow by prioritizing payments based on urgency and available funds. Regular reconciliation and clear communication with both customers and suppliers are essential to maintaining healthy financial relationships and ensuring the business operates smoothly.

Over the last few years, the payments industry has undergone significant changes; these changes can significantly impact AR and AP, making it essential to understand the implications for your business. 

For example, implementing online portals for electronic invoices can enhance efficiency, but it may also create challenges for AR teams if suppliers have to deal with multiple portals and processes. To achieve optimal performance, your credit and accounts receivable team can do four things.

1. Clean up your master files – By reviewing your customer lists and removing duplicate accounts, identifying related accounts, and ensuring that your existing accounts have current and validated contact information, you can streamline your billing and collections processes. In an electronic environment, it’s important to avoid wasting time correcting outdated or inaccurate information that can slow down the entire process.

2. Accept more than one form of electronic payment – To eliminate as many paper checks as possible, consider accepting payment via ACH, credit cards, and wire transfers. Work with your credit card merchant to ensure that you qualify for high-ticket rates so that credit cards can be accepted for even more transactions.

3. Overhaul your customer enrollment tactics – Segment your buyers by transaction volume and size so that you can start a comprehensive enrollment campaign. Your goal should be to maximize the dollars flowing through the EIPP (Electronic Invoice Presentment and Payment) system. New customers should automatically be entered into the EIPP system and not be given the choice of receiving paper invoices or paying by check. 

4. Communicate and train – Ensure that every team member with responsibilities related to the order-to-cash process understands the dynamics of an EIPP system and can support the product and its enrollment process. Good communication and training are essential to ensuring everyone is on the same page, and the system is used to its fullest potential.

How Automation Can Streamline the AR and AP Process

Successful businesses understand the importance of optimizing accounts payable and accounts receivable through streamlined workflows powered by automation. Embracing automated processes enables them to simplify their operations, minimize errors, and expedite essential financial tasks, ensuring a more efficient and effective financial management system. Let’s explore how automation can transform your AR and AP processes for better cash flow management.

1. Automate your finance operations with the latest technology

The automation of crucial yet mundane and time-consuming AP and AR tasks has become easier and more affordable with the advent of RPA, AI, and other technologies.

Modern AR automation software lets you check the status of your receivables, track correspondence with your customers, and schedule alerts for payments. Keeping in touch with customers through emails and alerts about payments helps you avoid bad debt and speed up the cash cycle.

For payables, you can almost completely automate all the steps involved except for the approvals, which can be done in a few clicks. Automation software can also help you diagnose problems in your AP workflow and provide insights into your payments with analytics tools. AP automation also improves your payment accuracy. The best AP automation tools in the market capture invoice data at 99.5% accuracy.

2. Reduce human error and improve efficiency with automation

Manual data entry and processing can be error-prone, leading to delays, incorrect payments, and even financial losses. Automation of AP and AR processes reduces the risk of human errors by eliminating the need for manual data entry and processing. Automated workflows ensure that invoices are processed accurately, payments are made on time, and reminders are sent to customers for overdue payments. This saves time, reduces the risk of errors, and improves the overall efficiency of your finance operations.

3. Improve cash flow visibility with real-time reporting and analytics

Automation software provides real-time reporting and analytics that give you a complete view of your cash flow and financial health. With automated AP and AR processes, you can easily track payments, invoice statuses, and customer balances and monitor your cash flow in real time. This enables you to quickly identify and address any issues or bottlenecks in your finance operations. You can also generate customized reports and dashboards that provide detailed insights into your financial performance, helping you make informed decisions to improve your cash flow and profitability.

By embracing automation in your AP and AR processes, you can streamline your finance operations, reduce errors, improve efficiency, and gain better visibility into your cash flow. This will save you time and money and help you make informed decisions, enabling you to grow and scale your business more effectively.

Streamline Your AR and AP Processes with HighRadius

Effectively balancing Accounts Payable (AP) and Accounts Receivable (AR) is essential for maintaining healthy cash flow and financial stability. Automating both AP and AR processes not only reduces manual effort but also gives you greater control over your cash management.

HighRadius provides advanced, AI-powered solutions designed specifically for mid-sized businesses and enterprises. Our robust AR automation suite streamlines collections, cash reconciliation, credit risk management, and e-invoicing, allowing your team to focus less on administrative tasks and more on strategic decisions. Simultaneously, our AP automation capabilities simplify invoice processing, eliminate costly errors, and ensure timely vendor payments, strengthening your supplier relationships and optimizing your company’s cash outflow.

Leading businesses like ShurTech and J.J. Keller trust HighRadius to enhance both AR and AP processes, resulting in significant improvements in cash flow, operational efficiency, and overall financial health.

Take control of your cash flow today. Schedule a demo with HighRadius and see how automation can transform your AP and AR management.

FAQs on Accounts Receivable vs Accounts Payable

1. What is the difference between AR and AP process?

The AR process involves managing money owed to a company by its customers, including invoicing and payment collection. The AP process involves managing money a company owes to its suppliers, including receiving invoices, verifying them, and making payments. AR focuses on incoming funds, while AP deals with outgoing funds.

2. How do you reconcile AP and AR?

Reconciling AP and AR involves matching records in the company’s accounting system with bank statements and other financial documents. For AR, this means ensuring all payments received are recorded correctly. For AP, it involves verifying that all payments made match invoices received and recorded.

3. Why do AP and AR matter a lot?

AP and AR are crucial for maintaining a company’s financial health. Efficient management of AR ensures timely revenue collection, supporting cash flow. Effective AP management controls outgoing payments, ensuring liquidity and strong supplier relationships.

4. Can AP and AR be done by the same person?

Yes, in smaller businesses, one person may handle both accounts payable (AP) and accounts receivable (AR). However, in larger companies, these functions are often split between departments for better accuracy, accountability, and efficiency in managing finances and workflows.

5. Which is harder, accounts payable or receivable?

Both AP and AR have their challenges. Accounts payable involves managing payments to vendors and ensuring timely disbursements. Accounts receivable, on the other hand, requires collecting payments from customers and maintaining a healthy cash flow. The difficulty varies based on the volume and complexity of the business.

6. What is the role of AP and AR in cash flow management?

AP and AR both play essential roles in cash flow management. AP ensures that outgoing payments are made promptly to avoid late fees, while AR focuses on collecting incoming payments on time. Effectively managing both processes helps maintain liquidity and ensures the business operates smoothly without cash shortages.