Accounts payable vs accounts receivable: Fully explained

Accounts payable (AP) and accounts receivable (AR) are the backbone of your business’s cash flow—one tracks what you owe, the other tracks what you’re owed.

Managing both AP and AR well keeps your operations smooth, your liquidity strong, and your profitability on track. This guide dives into the key differences and smart strategies for handling them.

Accounts payable vs accounts receivable: Differences at a glance

Accounts payable (AP) and accounts receivable (AR) are like yin and yang for your business’s finances—opposites that keep cash flow balanced, representing the money a business owes and is owed, respectively.

AP is the money your business owes to suppliers for goods or services purchased on credit, recorded as a liability on your company’s balance sheet. AR is the money customers owe you for goods or services provided on credit, recorded as an asset. Together, AP and AR help you manage cash flow and maintain financial health, ensuring you stay on top of what’s owed and what’s coming in.

Here’s a quick comparison of their differences:

Understanding AP and AR: A full breakdown

Understanding how accounts payable and accounts receivable serve as the heartbeat of your business’s cash flow is essential to managing them effectively. Here’s a breakdown of eight key questions to help you navigate the differences between AP and AR.

1. What is accounts payable and accounts receivable?

AP: Accounts payable (AP) is the money your business owes to suppliers for goods or services received on credit. It’s a short-term liability that shows up on your company’s balance sheet and reflects cash outflows you’ll need to manage soon. Typically, AP is recorded when an invoice is received, often for costs like invoices for office supplies, utilities, or vendor services. They’re also tied to payments due within agreed payment terms like net 30 or net 60.

AR: Accounts receivable (AR) is the money customers owe your business for goods or services you’ve provided on credit. It’s recorded as a current asset on your balance sheet, representing future income. AR keeps cash flowing, with invoices often tied to payment terms like net 30 or net 60, ensuring you’re always tracking what’s coming in.

Key difference: Accounts payable tracks money going out, while accounts receivable tracks money coming in—two sides of your business’s cash flow story.

2. What is the process and focus of each?

AP: Accounts payable is all about what’s going out. When a supplier sends an invoice, your business records it as a liability in the general ledger, similar to trade payables. The goal? Keep cash flowing while maintaining good vibes with your vendors. Paying on time strengthens relationships, but smart AP management means timing those payments strategically to avoid late payments.

AR: Accounts receivable flips the script to focus on what’s coming in. When a customer buys on credit, what they owe becomes an asset in your books. From tracking invoices to nudging slow payers, proper AR management ensures your cash flow doesn’t hit any speed bumps.

Key difference: AP focuses on managing payments to suppliers, while AR focuses on collecting payments from customers.

3. How are they recorded?

AP: Think of AP as your “IOU” column. It’s recorded as a current liability on the balance sheet, representing short-term debts you’ll need to settle soon—typically within a year.

AR: AR lives in your “money coming soon” column. It’s recorded as an asset because it represents cash you’re waiting to collect from customers.

Key difference: AP is recorded as a liability (what you owe), while AR is recorded as an asset (what you’re owed).

4. How should they be managed?

AP: Pay smart, not just on time. Negotiate supplier terms that work for you (net 60 > net 30) and snag early-payment discounts where you can. Use accounting software to track due dates and avoid late fees. Great AP management doesn’t just keep your suppliers happy; it frees up cash for what matters most and improved working capital.

AR: Set clear credit policies upfront, track invoices regularly, and don’t shy away from offering a discount for early payments. Proactive AR management for your receivable process reduces the risk of overdue invoices and keeps your finances on track. Keep cash flowing in and bad debts out.

Key difference: AP management is about timing payments to optimize cash flow, while AR management is about accelerating collections to keep cash flowing in.

5. What are some examples of accounts payable and receivable?

AP example: A small business orders $15,000 worth of custom desks for its new office. The supplier gives them 30 days to pay, so the $15,000 is logged as accounts payable. The business owner times the payment strategically, holding onto cash a bit longer but still paying before the due date to avoid penalties.

AR example: A graphic design firm completes a $7,500 branding project for a client and sends an invoice with net 60 terms. That $7,500 is recorded as accounts receivable. To nudge the client to pay sooner, the firm offers a 5% discount for payments made within 10 days.

Key difference: AP involves paying for what your business needs, like supplies, while AR involves getting paid for the products or services you deliver.

6. How do they impact cash flow management?

AP: Money out, cash down. Every payment you make reduces cash on hand, so timing is everything. Strategic bookkeeping and automation help manage these outflows efficiently.

AR: Money in, cash up. Every invoice paid means more liquidity for your business—giving you the funds to reinvest in your business.

Key difference: AP reduces cash flow when payments go out, while AR improves cash flow when payments come in. Also, it's good to note that AR is different from trade receivables as it includes trade receivables and also other outstanding payments. Trade receivables only cover money tied directly to credit sales.

7. What are their typical payment terms?

AP: Suppliers usually set the terms (think net 30, net 60), but a little negotiation can buy you time or unlock discounts.

AR: You’re in the driver’s seat here. Set clear terms for your customers to encourage prompt payments—sweeten the deal with early-payment perks if needed.

Key difference: AP terms are set by suppliers and delay cash outflows, while AR terms are set by you and affect how fast cash flows in.

8. What are the turnover ratios for each?

AP turnover ratio: Your AP turnover ratio shows how quickly you’re paying suppliers. A high ratio means you’re paying on time (or early), which keeps vendors happy.

AR turnover ratio: Your AR turnover ratio measures how fast you’re getting paid. A higher ratio signals efficiency—cash is moving in fast.

Key difference: AP turnover shows how quickly you pay suppliers, while AR turnover measures how quickly customers pay you.

Commonalities and challenges with AP and AR

What do AP and AR have in common?

Accounts payable and accounts receivable may handle opposite sides of cash flow, but they share some key similarities. Both rely on clear processes, accurate recordkeeping, and timely action to keep operations running smoothly.

They’re tied to credit terms—either negotiating payment schedules with suppliers or setting expectations for customers. Whether you’re optimizing AP to stretch cash or improving AR to collect faster, the goal is the same: to keep your business running efficiently and profitably.

How are AP and AR different?

AP and AR each come with their own set of challenges. For AP, the biggest hurdles include managing tight payment deadlines, avoiding late fees, and maintaining strong supplier relationships while balancing cash flow. The AR process, on the other hand, faces issues like overdue invoices, customer disputes, and the risk of bad debts.

Both require proactive management to overcome these challenges and keep your business’s cash flow steady.

Why automation is a game-changer for AP—and AR, too

Automation in accounts payable is transforming how businesses manage outgoing cash. By streamlining invoice processing, automating payment schedules, and reducing manual data entry, AP software ensures payments are accurate and on time.

This doesn’t just save time—it helps maintain supplier trust and reduces manual errors in the payable process.

But the benefits don’t stop there—when AP runs smoothly, it indirectly improves AR for your suppliers, ensuring faster cash flow across the board. AP automation doesn’t just optimize your payments; it helps create a healthier financial ecosystem.

Become a game-changer by automating AP with Ramp

Ramp's AI-driven accounts payable software transforms how businesses manage their finances by simplifying and optimizing every step of the AP process. With cutting-edge automation, Ramp helps your team work smarter, while ensuring payments are accurate, on time, and strategically managed.

Our platform’s AI-powered insights uncover real-time trends in spending, vendor relationships, and payment cycles, giving finance teams the data they need to make confident decisions.

AP automation is a game-changer—set your business up for long-term success with Ramp’s AP software.