Accounts Payable vs. Accounts Receivable: The Complete Guide

What's the difference between accounts payable vs accounts receivable? Short answer:

• Accounts Payable = Money you owe
• Accounts Receivable = Money people owe you
  

For business owners, managing the timing of when you pay suppliers (AP) and when customers pay you (AR) can mean the difference between making payroll and scrambling for a line of credit. 

This guide explains what accounts payable and receivable are, how they work in tandem to determine your working capital, why bad systems can hurt your business relationships, and practical solutions to improve cash flow. 

If you’re tired of antiquated accounting systems that chew up your valuable time, see how Nickel’s AR/AP automation solution can help your business save time on accounts receivable processes. Our seamless QuickBooks integration and simple interface will allow you to collect money more quickly and improve your cashflow.  

Accounts Payable vs Accounts Receivable: A Quick Comparison

Before diving into the details, let’s take a quick look at the essential differences between AP and AR. 

What is Accounts Payable?

Accounts payable (AP) covers all business expenses except payroll, like bills you receive from a supplier, rent, or subcontractor payments. These debts are a short-term obligation you’ve committed to and appear as a current liability on your company’s balance sheet. 

Accounts Payable in Practice

Here's how AP works in the real world:

1. You order $10,000 of materials from a supplier on Net 30 terms
2. The $10,000 sits in AP until you pay
3. When you pay, AP decreases and cash decreases

What Does an AP Professional Do?

• Invoice processing: Receive, verify, and enter supplier invoices into the accounting system
• Payment execution: Schedule and issue payments (checks, ACH, wire transfers) on time
• Vendor management: Maintain vendor records, resolve billing disputes, negotiate payment terms
• 3-way matching: Match invoices to purchase orders and receiving documents before approving payment
• Reconciliation: Ensure AP ledger balances match the general ledger and vendor statements

What is Accounts Receivable?

Accounts receivable (AR) is the money owed to your business. Common examples of bills that might fall into this category include an invoice sent by a branding company to a client, a bill sent by a medical practice to a patient, or a shipment of supplies from a manufacturer to a corporate customer. 

The AR departments of the branding company, the medical practice and the manufacturer will handle the process of getting the money for services or goods already provided.

Accounts Receivable in Practice

Here's how AR works in the real world:

1. You complete a $50,000 project and invoice the customer on Net 30
2. The $50,000 sits in AR until customer pays
3. When they pay, AR balance decreases and cash increases
4. Key point: AR represents expected future cash—but it's not cash yet

What Does an AR Professional Do?

• Invoicing: Create and send invoices to customers promptly after goods/services are delivered
• Collections: Follow up on overdue accounts, send payment reminders, escalate delinquent accounts
• Cash application: Match incoming payments to the correct invoices and customer accounts
• Account reconciliation: Investigate discrepancies between customer invoices and payments to figure out why they don’t match
• Reporting: Generate aging reports that track overdue invoices by DSO (Days Sales Outstanding) and forecast cash inflows

For a deeper dive into AR roles and responsibilities, how to pick an AR professional with skills that are best suited for your industry, and information on the performance metrics used by professionals in this area, see Nickel’s comprehensive guide on Accounts Receivable Job Functions

How AP and AR Work Together to Determine Financial Health

AP and AR aren't just accounting categories. They're the two forces that determine whether your business is gasping for cash or has a healthy balance sheet. 

The dynamic between money coming in (AR) and money going out (AP) impacts your cashflow, liquidity and operational stability.

You generally want a higher AR ratio. This indicates you’re bringing in more money than you’re spending. Many businesses aim for AR to AP ratios of 2:1 or higher. 

Timing is a critical component of this equation. You can have strong sales and still have low working capital if AR collects slowly and AP comes due fast. So you’ll want to collect money faster than you send it out. You can do this by setting shorter net terms on payment due to you.

On top of practices that improve your cashflow, there are some general standards that businesses should follow to make sure their accounting systems are up to industry benchmarks.

Best Practices for Managing AP and AR

GAAP Principles for AP and AR Management

Understanding Generally Accepted Accounting Principles (GAAP) can help you maintain financial health and ensure your AP/AR practices meet financial reporting standards. These standards include:

Accrual Basis Accounting: Under GAAP, most businesses must record AR when revenue is earned (invoice sent) and AP when expenses are incurred (invoice received)—not when cash changes hands. This creates the timing gap between "on paper" and "in bank."

Revenue Recognition: AR should only be recorded when the performance obligation is satisfied (goods delivered, service completed). Premature AR recognition inflates assets and misleads stakeholders.

Matching Principle: Expenses (AP) should be recorded in the same period as the revenue they helped generate. This ensures accurate profit reporting.

Allowance for Doubtful Accounts: GAAP requires estimating uncollectible AR and recording a contra-asset (allowance). Common methods include:

How Poor AP/AR Practices Damage Critical Relationships

Mismanaged AP and AR practices don't just hurt your cash flow—they can permanently damage relationships with the partners your business depends on: lenders, suppliers, and customers. The impacts differ depending on whether the problem is on the AP side, the AR side, or both.

Damage to Bank and Lender Relationships

Banks evaluate your business through the lens of AP/AR health. Poor practices create red flags that can limit your access to capital when you need it most.

How poor AR practices damage lender relationships:

• High AR aging: If a significant portion of your receivables are 60+ days overdue, lenders see collection risk. Businesses with poor AR management are more likely to be denied credit or offered unfavorable terms.
• Low AR turnover: Slow collection signals that your revenue isn't converting to cash efficiently—a red flag for repayment ability.
• Growing AR without revenue growth: This pattern suggests you're extending credit to customers who can't or won't pay.
• High bad debt write-offs: Frequent write-offs indicate poor credit decisions or collection processes.

Consequences of poor AR on lending:

• Loan denials or reduced credit limits
• Higher interest rates

How poor AP practices damage lender perception and relationships:

• Inconsistent payment history: Late AP payments signal cash flow instability, even if you eventually pay.
• Rising AP balances: Growing payables without corresponding revenue growth suggests you're using suppliers as an unofficial credit line.
• Vendor liens or judgments: Unpaid suppliers who file liens or lawsuits create legal red flags on your credit profile.
• Trade references: Lenders can contact your suppliers—consistently late payments will surface.

Consequences of poor AP on lending:

• Personal guarantee requirements (lenders want recourse beyond the business)
• Shorter loan terms or more frequent review periods
• Collateral requirements increase
• Credit line reductions during renewals

Damage to Supplier Relationships (Driven by Poor AP)

Supplier relationship damage is often an AP problem. Your suppliers are watching your payment patterns, and consistently late payments erode trust.

What suppliers track:

• Payment timing: Are you paying on terms, or consistently 15-30 days late?
• Communication: Do you notify them of delays, or do they have to chase you?
• Order patterns: Erratic ordering combined with late payments signals instability.

Consequences of poor AP practices:

• Lost early payment discounts: If you're always paying late, suppliers won't offer 2/10 Net 30 terms. That can cost you thousands of dollars over a year.
• Shifted to COD or prepayment: Suppliers may require cash on delivery or upfront payment, further straining your cash flow.
• Deprioritized orders: During supply shortages, suppliers fulfill reliable payers first. Late payers go to the back of the line.
• Price increases: Suppliers may quietly raise prices for customers who are difficult to collect from—they're pricing in their own collection costs.
• Terminated relationships: In extreme cases, suppliers refuse to do business with you, forcing you to find alternatives at higher prices or longer lead times.

Damage to Customer Relationships (Driven by Poor AR)

Customer relationship damage stems from AR practices—specifically, how you invoice and collect. Poor AR management can alienate the customers you need to keep.

What damages customer relationships:

• Billing errors: Sending invoices with wrong amounts, duplicate invoices, or unclear payment instructions frustrates customers and delays payment. 
• Inconsistent enforcement: If you extend grace periods to some customers but not others, word can get around.
• Inflexible policies: Refusing to discuss payment plans during a customer's temporary cash crunch may collect one invoice but lose a long-term customer.
• Poor invoicing timing: Sending invoices weeks after project completion, or with unclear descriptions, invites disputes.

Consequences of poor AR practices:

• Lost repeat business: Customers who feel mistreated during collections take their business elsewhere.
• Disputed invoices: Billing errors and unclear invoices lead to disputes, delaying payment further and frustrating parties.
• Relationship downgrade: A customer who was a partner becomes transactional—they'll shop around on every job.
• Payment delays as retaliation: Customers who feel stiffed on collections may deliberately slow-pay future invoices.

In each of the scenarios above, mismanaged accounting practices can damage relationships that are vital to your business. An overloaded or poorly managed AR/AP department can seriously affect your company’s financial status. 

The job isn’t easy, and there’s a lot to keep track of. Thankfully, some newer technologies are helping free up time for AR/AP professionals and allowing them to hone their attention on critical tasks that improve cashflow.

How Automation is Transforming AP and AR

The Automation Trend in AP/AR

Automation is rapidly reshaping how businesses manage accounts payable and receivable. What was once a fully manual process—paper invoices, check writing, phone calls to chase payments—is increasingly handled by software. 87% of firms with automated AR systems say the speed of their process has improved. Other research shows that 93% of CFOs think AP automation can result in better invoice tracking.

How Automation Helps AP Professionals

For AP clerks, controllers, and business owners managing payables:

• Invoice capture: OCR technology extracts data from paper/PDF invoices automatically—no manual data entry
• Approval workflows: Invoices route to the right approver based on amount, vendor, or category—no chasing signatures
• 3-way matching: System automatically matches invoice ↔ PO ↔ receiving document—flags exceptions only
• Scheduled payments: Set "pay on due date" rules so you never miss a deadline or pay too early
• Vendor portal: Suppliers can submit invoices and check payment status without calling your team
• Audit trail: Every action logged automatically—no scrambling before audits

Time savings: AP automation typically saves 5-10 hours/week for a small business, freeing AP staff for strategic work like vendor negotiation and cash flow planning.

How Automation Helps AR Professionals

For AR specialists, collections staff, and business owners managing receivables:

• Invoice generation: Invoices created and sent automatically when orders ship or projects complete
• Payment reminders: Automated email/SMS reminders before due date, on due date, and after—no manual follow-up
• One-click payments: Customers pay via link in email; no account creation, no friction
• Multiple payment options: Accept ACH, credit card, and other methods from one platform
• Auto-reconciliation: Payments matched to invoices automatically; cash applied without manual work
• Aging dashboards: Real-time visibility into who owes what and for how long
• Dunning workflows: Escalation sequences for overdue accounts run automatically

Time savings: AR automation typically saves 5-15 hours/week on collections and reconciliation, while also improving DSO (Days Sales Outstanding) by 10-20%.

Take the Next Step: See How Nickel Can Help You

If you're struggling with late customer payments or spending hours on collections, the first step is understanding your AR aging—how many invoices are 30, 60, 90+ days overdue? That's where the cash flow leak is hiding.

If you're still managing AP/AR manually, here's a practical starting point: 

1. Audit your current process: How many hours/week on AP? On AR? What's your error rate?
2. Identify the biggest pain point: Is it invoice entry? Payment chasing? Reconciliation? Start there.
3. Choose software that integrates with your accounting system: QuickBooks, Xero, or Sage integration is non-negotiable
4. Start with one side: Most businesses see faster ROI starting with AR automation (direct cash flow impact)
5. Measure results: Track time savings, DSO improvement, and error reduction after 90 days

If this evaluation shows that your AR process is working less effectively than how you’d like, don’t worry. Nickel can dramatically improve your procedures.