Accounts payable vs accounts receivable

The difference in one paragraph

Accounts receivable (AR) is money customers owe your business for goods or services already delivered on credit; it is an asset. Accounts payable (AP) is money your business owes suppliers for goods or services already received on credit; it is a liability. The difference matters because AR is cash coming in and AP is cash going out, and managing both decides how much cash the business has.

Every credit sale your business makes creates a receivable for you and a payable for your customer. The two are mirror images of the same invoice, which is why the accounting, the ageing reports and the controls look so similar on both sides. In IFRS financial statements they usually appear as trade receivables within current assets and trade payables within current liabilities.

• Accounts receivable: asset, normal debit balance, arises from sales invoices, reduced by customer receipts and credit notes.
• Accounts payable: liability, normal credit balance, arises from supplier invoices, reduced by payments and supplier credit notes.
• AR risk: the customer does not pay, measured through expected credit losses under IFRS 9.
• AP risk: paying the wrong amount, the wrong supplier or the same invoice twice.
• AR metric: days sales outstanding (DSO). AP metric: days payable outstanding (DPO).

Journal entries for accounts receivable

The examples use a business in the EU charging an illustrative 20 percent VAT. A credit sale of goods worth EUR 10,000 before VAT creates an invoice for EUR 12,000. The receivable is recorded gross, including VAT, because that is what the customer owes; the VAT belongs to the tax authority, not to revenue.

When the customer returns part of the goods, the business issues a credit note that reverses revenue and VAT for the returned portion. When the receivable is settled, the receivable is cleared against the bank. At the end of the sequence below, the customer owes nothing: 12,000 invoiced, less 1,200 credited, less 10,800 received.

• Credit sale: Dr Trade receivables 12,000 / Cr Revenue 10,000 / Cr VAT payable 2,000
• Return of one tenth of the goods: Dr Revenue 1,000 / Dr VAT payable 200 / Cr Trade receivables 1,200
• Customer pays the balance: Dr Bank 10,800 / Cr Trade receivables 10,800
• Increase in loss allowance of 500 at month end: Dr Impairment loss on trade receivables 500 / Cr Loss allowance 500
• Write-off of an uncollectable 300 already provided for: Dr Loss allowance 300 / Cr Trade receivables 300

Journal entries for accounts payable

A supplier invoice for EUR 5,000 of inventory plus EUR 1,000 VAT creates a payable of EUR 6,000. The input VAT is recorded as recoverable, not as part of inventory cost, as long as the business can reclaim it. Expenses that are not inventory, such as a marketing agency's fee, follow the same pattern with an expense account instead of inventory.

Payables should be recorded when goods or services are received, not when the invoice is paid. At a period end, goods received but not yet invoiced are accrued so that both the expense or inventory and the liability are complete.

• Supplier invoice for goods: Dr Inventory 5,000 / Dr VAT recoverable 1,000 / Cr Trade payables 6,000
• Supplier credit note for damaged goods worth 500 plus VAT: Dr Trade payables 600 / Cr Inventory 500 / Cr VAT recoverable 100
• Payment of the balance: Dr Trade payables 5,400 / Cr Bank 5,400
• Goods received not invoiced at month end, 2,000: Dr Inventory 2,000 / Cr Accrued purchases 2,000
• Service invoice: Dr Marketing expense 3,000 / Dr VAT recoverable 600 / Cr Trade payables 3,600

Subledgers and control accounts

No business manages receivables from a single ledger account. Each customer and each supplier has its own account in a subsidiary ledger: the receivables (sales) ledger and the payables (purchase) ledger. The general ledger holds one control account for each, trade receivables and trade payables, whose balance must equal the total of the individual accounts in the subledger.

The reconciliation between subledger and control account is one of the most important month-end checks. If they differ, something was posted to the control account without a customer or supplier attached, typically a manual journal, or a subledger entry never reached the ledger. Good practice is to block manual journals to control accounts altogether so every movement comes from an invoice, credit note or payment. Our general ledger explained guide covers control accounts in more depth.

Supplier statement reconciliation is the external version of the same check: compare the supplier's statement of your account with your purchase ledger and explain every difference, usually invoices in transit, payments not yet received by the supplier, or disputed items.

Ageing reports and expected credit losses

An ageing report sorts each open invoice into buckets by how long it has been due. For receivables it shows who is late and by how much; for payables it shows what must be paid this week. The standard buckets are current (not yet due), 1 to 30 days overdue, 31 to 60, 61 to 90 and over 90 days.

IFRS 9 requires a loss allowance for expected credit losses on trade receivables, and for receivables without a significant financing component the simplified approach measures lifetime expected losses, often with a provision matrix built on the ageing. In the illustration below, receivables of EUR 100,000 carry assumed loss rates by bucket. The allowance is EUR 3,625, so receivables are shown at EUR 96,375. Real rates must come from the entity's own loss history adjusted for current and forward-looking conditions.

• Current: 55,000 at 0.5 percent = 275
• 1 to 30 days overdue: 25,000 at 2 percent = 500
• 31 to 60 days overdue: 12,000 at 5 percent = 600
• 61 to 90 days overdue: 5,000 at 15 percent = 750
• Over 90 days overdue: 3,000 at 50 percent = 1,500
• Total receivables 100,000, loss allowance 3,625, net carrying amount 96,375

DSO and DPO: measuring how fast cash moves

Days sales outstanding measures how many days of credit sales are tied up in receivables: trade receivables divided by annual credit sales, multiplied by 365. Days payable outstanding measures how long the business takes to pay suppliers: trade payables divided by cost of sales (or credit purchases), multiplied by 365. Use VAT-exclusive figures on both sides, or VAT-inclusive on both, but never mix them.

Worked example: receivables of EUR 100,000 against credit sales of EUR 730,000 give a DSO of 100,000 divided by 730,000, multiplied by 365, which is 50 days. Payables of EUR 54,000 against cost of sales of EUR 438,000 give a DPO of 45 days. If inventory of EUR 72,000 represents 60 days of cost of sales, the cash conversion cycle is 50 plus 60 minus 45, which is 65 days: the business funds 65 days of operations before customers' cash arrives. Our working capital guide shows what happens to that figure as revenue grows.

Read the trend, not the single number. A DSO rising from 42 to 50 days on flat sales means collections are slipping; a DPO that jumps may mean suppliers are being stretched, which can cost early-payment discounts or supply.

Payment terms and late payment rules

Payment terms are a commercial choice within legal limits. In the European Union, the Late Payment Directive (Directive 2011/7/EU) sets the frame for business-to-business transactions: contractual payment periods should not exceed 60 calendar days unless expressly agreed and not grossly unfair to the creditor, public authorities generally pay within 30 days, and a creditor who is paid late is entitled to statutory interest and a fixed minimum of EUR 40 in recovery costs. Member states implement the directive in national law and some set shorter limits, so check the rules for each country you trade in.

For the receivables team this means late-payment interest is a right that can be invoiced; for the payables team it means paying late is not free. Early-payment discounts are the opposite lever: a 2 percent discount for paying 20 days early is worth about 36.5 percent a year on a simple calculation (2 percent multiplied by 365 divided by 20), and slightly more when calculated precisely, so it is usually worth taking if cash allows.

Controls that protect AP and AR

Payables are a frequent target for external fraud, such as fake requests to change a supplier's bank details, and a common source of costly errors, because a payment that has left the bank is hard to recover. Receivables controls protect revenue and cash collection. These controls are proportionate for small and mid-sized businesses.

• Three-way match: pay a supplier invoice only when it agrees to the purchase order and the goods received note on quantity and price.
• Supplier bank detail changes: verify every change by calling the supplier on a number already on file, never one given in the email requesting the change.
• Duplicate payment checks on supplier, invoice number and amount before each payment run.
• Segregation: the person who sets up suppliers should not approve payments; the person who records receipts should not issue credit notes.
• Credit limits and credit checks before a new customer receives goods on account.
• Approval of credit notes and write-offs by someone outside the collection team.
• Monthly reconciliation of both subledgers to their control accounts and of key supplier statements.
• Follow-up of every receivable more than 60 days overdue, with a documented next action.

Accounts payable and receivable in Skyline Nexus ERP

In Skyline Nexus ERP receivables and payables live in the double-entry general ledger under Fiscal Authority. When adding an account in the chart of accounts, the Control Settings block lets you mark it Is Control Account with a Control Type such as Accounts Receivable (A/R) or Accounts Payable (A/P), and tick Requires Party so that a manual journal line on that account is rejected without a customer or supplier. Settings name the Default Accounts Receivable and Default Accounts Payable accounts that sales, purchases and payments post to when their auto-post switches are on.

For follow-up, Fiscal Authority reports include an AR Aging Report and an AP Aging Report with buckets for current, 1-30, 31-60, 61-90 and over 90 days, plus a Sub-Ledger report. The Customer and Supplier Financial Centres add a Customer Ledger, Statement of Account, Customer Aging Report, Supplier Ledger and Supplier Aging Report. On the payables side, the Treasury module includes Payment Processing with Scheduled Payments, Bulk Payments, Hold/Release and Invoice Matching.

Month-end checklist for AP and AR

Run through this list before closing each month. Each point prevents a misstatement that would otherwise surface at the audit.

• All sales invoices for goods shipped and services delivered are issued and dated in the period.
• Goods received but not invoiced are accrued; supplier invoices for next month's deliveries are not.
• Customer receipts are allocated to invoices; unallocated cash is investigated.
• Receivables and payables subledgers agree to their control accounts.
• Credit balances on customer accounts and debit balances on supplier accounts are reviewed and reclassified if material.
• The loss allowance is updated from the latest ageing.
• Related guides: bank reconciliation step by step, balance sheet reconciliation, and working capital and the cost of growth.