Accounts Payable vs. Accounts Receivable Explained

Key takeaways

• Recognize accounts payable as the money you owe suppliers and accounts receivable as the money customers owe you.
• Track both on your balance sheet, where accounts payable is a current liability and accounts receivable is a current asset.
• Manage AP and AR on time to protect your cash flow and keep vendor and customer relationships strong.
• Use a digital tool like Melio to automate payments, cut fees, and sync your accounting software.

The basics of AP and AR

Businesses have different needs than consumers, which means they sometimes get special treatment.

Consumer transactions are typically straightforward. A customer goes to a store or a website and buys whatever they need, paying for it on the spot. That’s because consumers often only buy one or two items. They care more about the price of a single product than about long-lasting ties with the business they shop from.

Business-to-business (B2B) transactions, on the other hand, are usually much larger and more complex. The B2B relationship between seller and buyer is a long and trusting one, in which both parties are dependent on each other.

Unlike consumers, businesses don’t always pay right away. Most B2B deals come with net terms of 30, 60, or even 90 days after goods are delivered and invoiced. That breathing room lets businesses use incoming revenue to cover their procurement.

This means businesses owe and are owed money for short periods of time on a regular basis. And that’s how the concept of accounts payable and receivable was born.

What’s accounts payable?

Accounts payable (AP) is the money your business owes suppliers for goods and services already received but not yet paid. It appears as a current liability on your balance sheet. In accounting terms, it refers to the full amount of all open and unpaid invoices (aka bills) a business has received from other companies for goods and services already rendered. This can mean any payment with net terms, installment payments, and even loans. Until the transaction is complete and paid in full, each of these bills is calculated into the company’s AP.

Since it refers to money you owe, accounts payable is listed under current liabilities in your balance sheet. Accounts payable includes any financial obligation a business has, as long as you received an invoice for items or services already delivered. This can mean office rent, supplies, utilities, inventory, equipment, professional services, and more.

What’s accounts receivable?

Accounts receivable (AR) is the money customers owe your business for goods or services you’ve delivered but not yet been paid for. It appears as a current asset on your balance sheet. Think of it as AP in reverse, where you are the vendor waiting to get paid by your business customers. So if you have open invoices issued to clients for goods and services already rendered, these are listed as accounts receivable.

This includes deals with net terms, which let customers pay after a certain time period. It also covers any other form of credit you give your customers, such as installments.

Since it’s money you expect to collect from customers in the near future, AR is listed under current assets in your balance sheet.

What’s the difference between accounts payable and accounts receivable?

Most businesses have both accounts payable and receivable to handle. Here are the main elements that differentiate the two.

How the AP and AR processes work

The AP process makes sure every bill is checked and paid on time. It usually runs in four steps.

1. Receive the invoice from your vendor.
2. Review the details to confirm the goods, price, and terms are correct.
3. Approve the invoice for payment.
4. Pay on time and record it in your books.

The AR process mirrors this in reverse. You set your credit terms, issue an invoice, track what’s owed, and collect the payment.

Why managing AP and AR matters

You can’t operate a business without spending money on equipment, supplies, or products. Without these things, you can’t generate revenue, and your business will need to shut down. But AP is about more than just paying the bills. It’s about cash flow, invoice management, and your company’s good name.

Correctly managing your AP, in other words the money coming out of your account, means:

• More control over your cash flow. When you know where you stand, you can create accurate cash flow projections and make sure your payments go out when you’re ready and never too soon.
• Better relationships with vendors. Everyone loves to get paid on time, and this goes a long way with vendors and suppliers. Smooth payments can mean better future deals, discounts, exclusive products, or optimized delivery times.
• Strong reputation. A business’s best asset is its good name. Being organized about your payments is always a good sign of your professional credibility.
• Saving time and money. An inefficient AP process can cost businesses in fees and work hours spent to put out fires. A good process means not every payment needs to be expedited, and it results in fewer mistakes to fix later.

Accounts receivable matters just as much. For many B2B companies, accounts receivable is a large share of income, so collecting it on time directly protects your cash flow. When it’s not managed correctly, you might face consequences, including:

• Lost funds. If you’re not tracking every open invoice, you might fail to collect on some transactions and effectively lose money.
• Unhealthy cash flow. Businesses use AR to establish how much cash they have to work with at any given time. When your receivables don’t come in on time, or at all, it can mean negative cash flow. That impacts your ability to cover your own expenses and AP.
• Wasted staff hours. Chasing down clients and customers to collect funds you’re owed is not only unpleasant, it’s also time consuming.

Streamline AP and AR processes for your SMB with digital solutions

Both AP and AR are crucial processes in the day-to-day operations of any business. Bigger companies often have whole departments dedicated to them so no detail goes unnoticed. But small businesses can also take action to improve the process by going digital.

Online AP and AR tools like Melio save time and protect cash flow. Key benefits include:

Accounts payable vs. accounts receivable FAQs