Accounts Payable vs Accounts Receivable: Differences
Accounts payable (AP) is the money a business owes its vendors for goods or services it has received but not yet paid for, while accounts receivable (AR) is the money customers owe the business for goods or services it has delivered but not yet been paid for. AP is a current liability, and AR is a current asset.
When your HVAC company buys $6,480 of custom ductwork from a sheet metal shop on 30-day terms, that $6,480 sits in your accounts payable and in the shop's accounts receivable until you pay.
AP vs AR at a glance
| Accounts payable (AP) | Accounts receivable (AR) | |
|---|---|---|
| Who owes whom | You owe a vendor | A customer owes you |
| What starts it | A vendor's invoice you receive and enter as a bill | An invoice you send a customer |
| On the balance sheet | Current liability (due within a year) | Current asset (turns into cash within a year) |
| What lowers it | You pay the vendor or apply a vendor credit | The customer pays or you issue a credit |
| Report to watch | AP aging: unpaid bills by how far past due | AR aging: unpaid customer invoices by how far past due |
| Main risk | Paying late, paying twice or paying a fraudster | Getting paid late or not at all |
The two are mirror images. The OpenStax accounting textbook describes money owed to a company as a receivable for that company and a payable for its customer. So every unpaid invoice sits in two sets of books at once: the seller's AR and the buyer's accounts payable.
One sale, recorded on both sides
First, debits and credits. In double-entry bookkeeping, every entry has a debit side and a credit side, and the two must be equal. Assets like AR and cash go up with a debit. Liabilities like AP go up with a credit, and so does revenue. Costs go up with a debit. So AP normally carries a credit balance and AR a debit balance.
A sheet metal shop in Ohio builds 24 duct sections at $270 each for an HVAC contractor's restaurant job and invoices $6,480 on March 4, net 30. That means the full amount is due 30 days after the invoice date, on April 3. Two sections arrive the wrong size and go back, so the shop issues a credit memo for $540, a document that cuts what the customer owes. The contractor pays the remaining $5,940 on April 2 by ACH, an electronic bank-to-bank transfer.
| Date | What happened | Sheet metal shop (AR side) | HVAC contractor (AP side) |
|---|---|---|---|
| Mar 4 | Invoice sent and entered | Debit Accounts receivable $6,480; credit Sales revenue $6,480 | Debit Job materials $6,480; credit Accounts payable $6,480 |
| Mar 11 | Two sections returned, $540 credit memo | Debit Sales returns and allowances $540; credit Accounts receivable $540 | Debit Accounts payable $540; credit Job materials $540 |
| Apr 2 | $5,940 paid by ACH | Debit Cash $5,940; credit Accounts receivable $5,940 | Debit Accounts payable $5,940; credit Cash $5,940 |
| Balance after Apr 2 | AR: $6,480 - $540 - $5,940 = $0 | AP: $6,480 - $540 - $5,940 = $0 |
Every entry balances, and the AR and AP columns move together: up $6,480, down $540, then down $5,940 to zero. Sales returns and allowances is a contra revenue account: it carries a debit balance and is subtracted from sales, so the original sale stays on record.
What differs is the other half of each entry. The shop books revenue, and the contractor books a cost against the restaurant job. If the shop tracks inventory, it also moves the ductwork's cost from inventory to cost of goods sold (what the items it sold cost it), and back for any returned sections it can reuse.
Where AP and AR sit on the balance sheet
The balance sheet is a snapshot of what a business owns, what it owes and what's left for the owners on a given date. The SEC's beginners' guide to financial statements describes current assets as things a company expects to convert to cash within one year, and current liabilities as obligations it expects to pay off within the year. The guide doesn't name AR or AP, but customer invoices due within the year fit the first, and vendor bills due within the year fit the second.
Together they feed working capital, the money left over if you paid your current debts out of your current assets. AR adds to it, and AP takes away from it.
They're valued differently, though. Many businesses show AR at what they expect to collect, not at what they billed. They keep an allowance for doubtful accounts, an estimate of the invoices that won't be paid, and that allowance is subtracted from accounts receivable on the balance sheet. AP gets no such estimate. You owe what the bills say until you pay or the vendor issues a credit.
Both show up only on accrual books, which record income when it's earned and costs when they're incurred. Cash-basis books wait for money to move, so their balance sheet shows neither, even while customers owe you and you owe vendors.
How AP and AR shape your cash
AR is money you've earned but don't have yet. AP is money you still have but have already promised away. The gap between how fast customers pay you and how fast you pay vendors decides how much of the wait the business has to cover from its own cash.
Two ratios measure it. Days sales outstanding (DSO) is AR divided by yearly credit sales (sales customers pay for later), times 365: roughly how many days customers take to pay. Days payable outstanding (DPO) is AP divided by yearly purchases on credit, times 365: how many days you take to pay vendors.
Take the same HVAC contractor. It sells $1,460,000 a year on credit, or $4,000 a day ($1,460,000 / 365), so $180,000 in AR means a DSO of 45 days ($180,000 / $4,000).
It buys $730,000 a year on credit, or $2,000 a day, so $60,000 in AP means a DPO of 30 days ($60,000 / $2,000). Its customers take 15 days longer to pay it than it takes to pay suppliers. It's owed $180,000 and owes vendors $60,000, so $120,000 more is due in than out, and until it arrives, payroll and everything else run on the bank balance or a credit line.
The fix usually sits on the AR side. Invoice the day the work is done, call when an invoice is a week late, and take deposits on special orders. Paying vendors late closes the gap on paper, but it costs you early-payment discounts and the supply house's patience.
Where AP and AR get tricky
A customer who is also a vendor
A general contractor might hire your electrical crew and also rent you a lift. You then have AR from that company and AP to it. Record both in full. If you agree to settle one against the other, put it in writing and record the offset as its own entry, a debit to AP and a credit to AR.
Retainage on construction jobs
Retainage is the part of each progress payment (a payment billed as work advances) that a customer holds back, usually until the work is substantially complete. A subcontractor should carry it as retainage receivable, apart from regular AR, and the general contractor as retainage payable, apart from regular AP. Mixed in with ordinary invoices, it makes good customers look slow.
Recording a customer payment as new income
A check that pays an invoice should reduce AR. Deposit it straight to a sales account and you count the same sale twice, while the invoice stays open.
Who handles AP and AR day to day
AP work is about paying the right bills once and on time. Our guide to the accounts payable process walks through each step, and the AP aging report, which sorts unpaid bills by how far past due they are, shows what needs paying first.
AR work is about getting paid. Invoices go out with clear terms, payments get applied to the invoice they pay, and anything past due gets a reminder, then a call.
Clyr works on the payables side. Its bill pay and accounts payable tools pull the line items from invoices vendors email in and route approvals by your rules, and you pay by ACH or check. Customer invoicing stays in your existing billing workflow, though expenses flagged billable flow to the client side of your connected platform, ready for invoicing.
FAQs
No, though on accrual books they're recorded at the same moment. Sending a $6,480 invoice adds $6,480 to revenue on the profit and loss statement, the report of a period's income and costs, and $6,480 to AR on the balance sheet. When the customer pays, revenue doesn't change: AR goes down and cash goes up. Revenue is what you earned. AR is the part you're still waiting for.
Yes. It happens when a customer overpays, pays the same invoice twice or pays a deposit before you've billed anything. A credit balance means you owe that customer money or work, so it's really a liability. Refund it, apply it to the next invoice, or move a deposit to a customer deposits account until you earn it.
In a small office it's common, and it works if someone else checks the results. The risk is one person who can both cut what customers owe and send money out, with nobody looking. Have the owner or an outside bookkeeper review both aging reports monthly, sign off on credit memos and write-offs, which reduce AR without any cash coming in, and approve every new vendor.
Yes. It's called factoring. A factoring company buys your unpaid invoices for less than their face value, pays you most of the money up front and usually collects from your customers directly. You get cash sooner and pay for it through the discount and fees. Check the recourse terms, which decide whether you must buy back invoices that customers never pay.
For cash, usually AR. The bills you owe are known, and within their terms you decide when to pay them. Money customers owe you is the part you don't control, and one slow customer can leave you short on payroll. Look at AR every week and chase anything past due.
