Accounts Payable vs Accounts Receivable: A Plain-English Guide
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Accounts payable and accounts receivable sound alike, and they mirror each other. One is money you owe. The other is money owed to you. Managing the timing between the two is one of the simplest ways to keep more cash in your business.
This guide explains both terms, walks through an illustrative example for a small print shop, and shows how to balance them.
The Short Answer
- Accounts payable (AP) is money your business owes to suppliers and vendors for things you’ve already received. It’s a liability.
- Accounts receivable (AR) is money customers owe your business for things you’ve already delivered. It’s an asset.
Your supplier’s receivable is your payable. When you buy paper on 30-day terms, you add to your accounts payable and the paper merchant adds to its accounts receivable.
| Accounts payable | Accounts receivable | |
|---|---|---|
| Who owes whom | You owe a supplier | A customer owes you |
| Balance sheet | Current liability | Current asset |
| Created by | A bill you receive | An invoice you send |
| Effect on cash | Cash goes out when you pay | Cash comes in when they pay |
| Goal | Pay on time, not early | Collect as fast as possible |
Why the Timing Matters
Cash is squeezed when you pay suppliers faster than customers pay you. If you pay for materials in 10 days but wait 45 days to get paid, you’re funding 35 days of every job out of your own pocket.
The more you grow, the bigger that gap gets. That’s why growing businesses often run short of cash even while profit looks good. See cash flow vs profit for more.
Worked Example: A Small Print Shop
A print shop buys paper and ink from a supplier and prints flyers and signs for local businesses. All figures are illustrative.
| Item | Amount | Terms |
|---|---|---|
| Accounts receivable (customer invoices unpaid) | $22,000 | Customers pay in about 40 days on average |
| Accounts payable (supplier bills unpaid) | $9,000 | Supplier allows 30 days; shop pays in 10 |
The shop is collecting slowly and paying fast. Each month it spends about $13,500 on supplies.
The owner makes two changes:
- Pays suppliers on the due date, not early. Moving from 10 days to 30 days means the shop holds about 20 more days of supply spending. At $13,500 a month, that’s roughly $9,000 more cash kept in the account.
- Asks for 50% deposits on large orders and sends invoices the same day. Average collection falls from 40 days to 28, cutting receivables by several thousand dollars.
Together, the shop frees up well over $10,000 in cash without changing prices or sales. Nothing about the profit changed. Only the timing did.
How to Manage Both
For accounts payable:
- Keep every bill in one place with its due date.
- Pay on time, not early, unless the supplier offers a discount for paying early that’s worth taking.
- Never pay late as a habit. Late fees and a damaged supplier relationship cost more than the cash you hold.
- Ask for longer terms once you have a good payment history.
For accounts receivable:
- Invoice the same day the work is done.
- State the due date clearly and make paying easy.
- Follow up on a schedule and check an aging report weekly. See accounts receivable for a simple routine.
Together, AR and AP are the main moving parts of working capital. Watching both each week is one of the easiest habits in small business financial management.
Frequently Asked Questions
Is accounts payable a debit or a credit?
In double-entry bookkeeping, accounts payable is a liability, so it increases with a credit and decreases with a debit. Accounts receivable is an asset, so it increases with a debit. Your bookkeeping software handles this for you.
Is accounts payable an expense?
Not on its own. The expense is recorded when you receive the goods or service. Accounts payable just tracks that you haven’t paid for it yet.
Should I pay suppliers early?
Only if there’s a reason, such as an early-payment discount or a supplier you need to keep on side. Otherwise, paying on the due date keeps cash in your business longer.
What is the difference between accounts payable and a loan?
Both are money you owe. Accounts payable comes from buying goods or services on credit from suppliers, usually without interest. A loan is borrowed money, usually with interest and a repayment schedule.
Can a small business have both payables and receivables?
Yes, almost every business that invoices customers and buys on credit has both. The goal is to keep the gap between when you pay and when you get paid as small as possible.
