Jasmine Birtles
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Accounts Payable vs Accounts Receivable: Know the Difference in 2026
Moneymagpie Team
19th Feb 2026
Every transaction creates two accounting entries in the company’s books: one to pay and one to collect. That’s the basis of accounts payable (AP) and accounts receivable (AR). In reality, however, there’s much more to these two functions than you might realize.
The accounts payable portion of the balance sheet provides a company’s portfolio of short-term liabilities due to vendors from whom the organisation has purchased goods or services. Conversely, accounts receivable represent amounts due to the organisation from its customers. The balance sheet lists the former as a liability and the latter as an asset.
The relationship between AP and AR determines whether the business has enough funds to meet its obligations—in other words, if its liquidity is sufficient. Good liquidity is achieved when all payables are scheduled strategically, and receivables are collected on time. Continue reading to understand what exactly separates AP from AR and learn more about their processes.
- What is accounts payable?
- What is the accounts payable process?
- What is accounts receivable?
- What is the accounts receivable process?
- How do accounts payable and accounts receivable differ?
- How do you calculate accounts payable turnover ratio?
- How do you calculate accounts receivable turnover ratio?
- Key takeaways
- Frequently asked questions about AP vs AR
What is accounts payable?
Accounts payable refers to the amount a business owes its vendors for actual goods purchased on credit. The company is expected to pay after delivery under agreed payment terms, such as Net 30 or Net 60 (30 or 60 days after invoice receipt). Given they’re short-term, these payments are generally settled within 12 months.
What is the difference between accounts payable and accrued expenses?
Accrued expenses are often mistaken for accounts payable because they overlap. Both focus on the costs the company has already incurred but hasn’t paid off. AP relies on invoices: the team receives an invoice and records a specific amount owed. Accrued expenses are recognized before any document even arrives in the AP inbox, so you estimate the cost until you receive the bill.
This approach is key to accrual accounting, during which you document revenue and expenses before the money is earned or spent. Accrued costs are basically known transactions (whatever your bills are, such as mortgage payments, utilities, etc.), and by recognizing the expense in advance, the company will be in a better position to control its budget.
What is the accounts payable process?
Before money leaves your company’s bank account, it’s processed through a structured workflow. A standard process would include the following seven steps:
- Create and send a purchase order. It’s generated either from an existing purchase requisition or from scratch. The document confirms the items or services you’re going to buy, along with their prices, quantities, and the agreed terms.
- Receive goods or services. The supplier delivers the items you ordered in the PO within the defined delivery window.
- Receive the invoice from the supplier. The document includes the amount due, the payment terms (e.g., Net 30, Net 60), and the items or services sold.
- Perform 3-way matching. At this point, the accounts payable function kicks in full force. The AP team will verify that each and every line item, quantity, price, date, and vendor information matches on all three documents.
- Add the invoice to the company’s system. After 3-way matching, the AP team codes the invoice and assigns it to the corresponding supplier and cost centers.
- Approve the invoice. The document is sent to the relevant departments or managers, depending on the type of purchase. For instance, critical equipment requires more approvals than general office supplies.
- Schedule and process payment. After successful sign-off, the AP team reconciles the invoice against the company’s and the vendor’s payment policies.
Companies can conduct this entire workflow manually with spreadsheets and email follow-ups. However, as invoice volume grows, the AP team ends up spending hours on processing alone, with no time for other responsibilities. Increased workloads prompt businesses to adopt AP automation software, such as Precoro, to automate invoice capture and maintain end-to-end visibility across the entire payables process.
What is accounts receivable?
Accounts receivable are funds that the company will receive from its customers in exchange for goods or services purchased on credit. You’ll notice that instead of vendors sending invoices to the company, now the company is sending invoices to its customers, who will pay later. The main source of accounts receivable is open invoices.
What is the difference between accounts receivable and revenue?
AR isn’t revenue. Revenue is what you earn from the sale, while AR only represents the portion that hasn’t been paid yet — what the customer owes you. For instance, if a customer purchased a $2,500 item on credit, the company records $2,500 in revenue and $2,500 in accounts receivable. AR stays in the books until it’s paid off, at which point it’s converted into money in the company’s bank account.
Notes receivable is another account that you’ll want to differentiate from standard AR. While AR is typically short-term, NR represents a formal agreement that’s backed by a promissory note. Businesses normally use notes receivable when the customer requires more time to repay the debt or when interest and stricter terms are specified.
What is the accounts receivable process?
The AR process looks nearly identical to the AP one, only in reverse: instead of sending payments, the company receives them. This workflow typically includes the following steps.
- Set payment terms. Before a customer can purchase anything, your company must specify when and how they need to pay. These guidelines should include accepted payment methods, payment due dates, and any early-payment discounts.
- Receive the purchase order. Once the customer knows what they want to purchase and at what price, they’ll send a PO to the company with their information on prices, quantities, and shipping deadlines.
- Deliver the goods or services. Next, the seller ships the product or provides the service they’re selling.
- Issue an invoice. After delivery, your company, the seller, issues an invoice based on the purchase order with pricing, quantities, and taxes. This invoice is then sent to the customer, who can pay it off later.
- Record a receivable in the company’s system. Once your AP team (or the AR department) issues the invoice, it’s entered into the company’s accounting software as unpaid and expected to be paid by the customer.
- Monitor transactions. It’s important to track outstanding invoices and due dates to follow up in time and prevent any unpaid balances from lingering.
- Collect payment. Allow multiple methods for quick, easy payments. If the customer hasn’t paid by the due date, your staff should send reminders as the due date approaches and additional notices once it’s past due.
- Reconcile an invoice. Finally, when your company receives a payment, the amount should be compared to the corresponding invoice to ensure the numbers match.
How do accounts payable and accounts receivable differ?
Both AP and AR shape the organization’s cash flow, but in entirely different ways.
Impact on the balance sheet and liquidity
The biggest difference between accounts payable vs receivable is what category they fall under on the business’s balance sheet. Accounts payable consists of short-term debts the company needs to pay off, so it’s classified as current liabilities. Accounts receivable, however, are the amounts the business expects to collect from customers, which is why it’s included in current assets.
Debit vs credit mechanics
Both concepts also have a different meaning from an accounting perspective. In double-entry bookkeeping, where every financial transaction is recorded at least twice, AP carries a credit balance, while AR appears as a debit. According to double-entry rules, liabilities increase with credits, while assets rise with debits.
Core objectives
Their objectives differ as well. The goal of AP is to protect the outflow by preserving working capital and maintaining sustainable vendor relations. Paying too early could stretch the budget for that period, while late payments damage the partnerships you’ve built with suppliers. Accounts receivable, on the other hand, has different priorities. It aims to reduce the risk of late customer payments or bad debt with quick collection and reconciliation.
Counterparties and risks involved
Each function also manages a different external relationship and risk profile. Accounts payable involves close cooperation with suppliers and vendors, where the main risks include late fees or supply disruptions. Accounts receivable mainly focuses on customers and clients, with the primary risks being delayed payments, bad debt, and liquidity shortages.
| Feature | Accounts Payable (AP) | Accounts Receivable (AR) |
| Balance sheet category | Current liability | Current asset |
| Cash flow impact | Outgoing | Incoming |
| Balance | Credit | Debit |
| Goal | Optimize outflow and maintain vendor trust | Accelerate inflow and protect revenue |
| Relationship focus | Suppliers and vendors | Customers and clients |
| Key risks | Late fees and disruptions | Bad debt and liquidity shortages |
How do you calculate accounts payable turnover ratio?
Accounts payable turnover ratio measures the rate at which the company pays its suppliers within the credit terms it’s given. It’s a helpful metric that indicates the state of your AP operations. If the result is high, the company processes payments quickly. If it’s low, payments take longer—a sign it’s time to reflect on current processes and identify what’s stalling the final step.
You only need two key figures to calculate the turnover ratio for AP:
- The total of credit purchases your company made during a specific period.
- The average AP balance you owed suppliers during that same period.
Instead of total credit purchases, you can also use cost of goods sold (COGS), and many companies do. However, COGS only includes costs directly related to what you sold, which doesn’t give you the full picture of the outflow.
Use this formula to determine AP turnover ratio:
Accounts Payable Turnover Ratio = Total Net Credit Purchases ÷ Average Accounts Payable Balance
Let’s assume the company purchased $1,200,000 worth of goods and services on credit during the year, and the average AP balance is $200,000:
AP Turnover = 1,200,000 ÷ 200,000 = 6
The ratio is 6, meaning the company paid off its average AP balance 6 times that year. Now convert it into days for the full picture:
AP Turnover in Days = 365 ÷ 6 = 61
The company paid suppliers every 61 days. This ratio is perfectly normal under Net 60 or Net 90 payment terms. However, if suppliers require payment within 30 days (Net 30), it’s a clear sign of non-compliance with the agreed deadline.
How do you calculate accounts receivable turnover ratio?
The accounts receivable turnover ratio indicates how fast you collect payments from customers. Just like its AP counterpart, this metric aims to assess how well the collections process is working at your company. If the number is high, payments are resolved quickly and with few obstacles. If it’s too low, then customers are taking too long to pay, which may signal lenient terms or issues on their end.
To calculate the AP turnover ratio, you need:
- The total amount of sales on credit for a specific period.
- Average account receivable balance during the same period.
The final formula for this metric is:
Accounts Receivable Turnover Ratio = Net Credit Sales ÷ Average AR Balance
We’re going to measure annual AR turnover. Let’s say the company had $3,000,000 in sales this year and an average AR balance of $250,000. According to the formula above, we’ll end up with a ratio of 12.
Accounts Receivable Turnover Ratio = $3,000,000 ÷ $250,000 = 12
When converted into days, the average payment cycle lasts:
Accounts Receivable Turnover Ratio in Days = 365 ÷ 12 = 30.417
This means that customers take 30 days to pay the company. If your terms are set to Net 30, this is right where you want to be. It’s considered high if you expect customers to pay you in 60 days.
Key takeaways
In a nutshell, payables and receivables offset each other on the balance sheet. AP represents what the company owes. AR records what customers owe the company. When you strategically manage both, you have a better understanding of whether the company’s current financial position is enough to meet its obligations.
The way the companies execute these functions makes all the difference. Late payments strain their relationships with vendors, while slow collections eat into the working capital. Careful management of both AP and AR matters: if you pay vendors and collect from customers on time, your cash flow is consistent and predictable.
Turnover ratios give you a concrete baseline number to work with. A dropping AP ratio means your team is falling behind on payments. A low AR ratio means customers are taking longer to pay. Measure both regularly to spot issues before they escalate.
Frequently asked questions about AP vs AR
What software is used for accounts payable and accounts receivable?
Some organizations have a single solution for both functions, while others have either only one or the other. Most of the time, there will be some sort of integration in place between the two. AP teams often use ERP systems and accounting solutions like QuickBooks and Xero. However, specialized tools often offer automation features that general-purpose software doesn’t. For instance, AP tools can automatically capture invoices, perform 2- or 3-way matching, and sync transactions with the general ledger. AR solutions help generate invoices from POs, send them to customers, and manage collections.
How do you integrate accounts payable with ERP systems?
Typically, AP tools can connect to the ERP system via an API or a native integration. Transactional data entered in one software application is automatically updated in the other. To make the integration smoother, notify the team that it’s happening and instruct them on how to sync data successfully. If needed, reach out to the customer support team in the AP tool and ask for help with the transition.
What are the benefits of using e-invoicing in accounts payable?
The main benefit of e-invoicing is its impact on manual work. Because e-invoices must be delivered in a structured, standardized format, most are automatically filled in based on auto-suggestions or matching POs. 3-way matching is also much quicker due to its structured format. By using e-invoices, you’re lowering the risk of invoices getting duplicated or lost.
Can the same person do AP and AR?
In small businesses, yes, one person or team can handle both functions, since the volume is relatively low. However, once your company grows, it’s not recommended. When one person handles both accounts payable and receivable, they may be distracted by both tasks, leading to unnecessary errors. Plus, separating the two means one person isn’t responsible for the entire cash flow. If your company doesn’t have enough staff to split the roles, add an additional approval step, like having a manager review transactions regularly.
Can accounts receivable be negative?
Generally, no, not under normal circumstances. Accounts receivable is basically money your customers must pay the company, so it carries a debit, positive balance. However, AR can be negative when a customer overpays an invoice or when the company issues a refund. Though the balance in these cases may temporarily appear negative, it usually means the company owes money to the customer.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.
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