A sale can increase reported revenue before it adds a dollar to your checking account. Accounts receivable records a sale before cash arrives, while accounts payable records a purchase before money leaves. A profitable business can look healthy on paper while customer payments and vendor due dates pull cash in opposite directions.
Accounts receivable (AR) is money customers owe for goods or services you've delivered. Accounts payable (AP) is money your business owes vendors for goods or services received. AR is money coming in and an asset on your balance sheet; AP is money going out and a liability. An invoice you send becomes AR on your books and AP on your customer's books.
The key differences between accounts receivable vs. accounts payable
AR records money customers owe you, while AP records money you owe vendors. The balance-sheet treatment, ledger entry, and payment timing differ because your business sits on opposite sides of each transaction.
Accounts receivable (AR) | Accounts payable (AP) | |
|---|---|---|
What it is | Money customers owe you | Money you owe vendors |
Balance sheet | Current asset (when collectible within one year) | Current liability |
Created by | Invoices you send | Bills you receive |
Ledger entry | Increases with a debit | Increases with a credit |
Cash flow | Cash coming in | Cash going out |
Timing | Set by your customer terms | Set by your vendor terms |
The debit and credit entries don't describe whether cash entered or left your checking account. They show how the transaction changes the accounts in your general ledger before payment occurs.
How AR works
When you deliver goods or services on credit, you send the customer an invoice, and the amount stays in accounts receivable until the customer pays. For example, if you invoice a customer $5,000 with Net 30 terms, that $5,000 stays in AR for up to 30 days.
Under accrual accounting, issuing the invoice generally debits AR and credits revenue, which records the sale even though cash hasn't arrived.
Once the customer pays, the receivable converts to cash. A partial payment reduces the open balance but doesn't close the invoice. If the customer pays $3,000 of the $5,000 invoice, your records still show $2,000 in AR.
How AP works
Recording a vendor bill generally credits AP and debits the related expense or asset account, depending on what you purchased. When a vendor delivers goods or services to your business, they send you a bill. That amount sits in accounts payable until you pay it. For example, if a supplier bills you $2,000 with Net 15 terms, that $2,000 stays in AP for up to 15 days.
Paying the bill reduces both cash and the AP balance. If you make a partial payment, the unpaid portion remains open and continues to appear on your AP aging report.
Why the difference matters for cash flow
Review AR and AP together because even a profitable business can run out of cash when collections lag behind payments. Under accrual accounting, your profit and loss statement records revenue when you earn it, not when the customer pays. So your books can show a profit while your checking account is nearly empty.
A cash squeeze can happen when payment terms don't line up:
A vendor may require payment on Net 15 or Net 30.
A customer may receive Net 45 or Net 60 terms.
That gap means bills can come due before customer payments arrive. According to the Federal Reserve's 2024 Small Business Credit Survey of more than 7,600 small employer firms, 56% cited paying operating expenses and 51% cited uneven cash flows as top financial challenges.
Compare the due dates on both sides before committing cash. If a large customer invoice won't clear until after payroll and vendor bills come due, the balance in your checking account doesn't show the full timing problem.
How AR and AP appear in your books
Your balance sheet shows the open trade accounts receivable and accounts payable totals at the balance-sheet date.
Classify both as "current" when you expect to collect or pay within one year (or within your normal operating cycle, if it's longer). Your operating cycle is the time it takes to go from buying materials to collecting cash from the resulting sale.
Managing AR and AP with aging reports
Aging reports group invoices and bills by age or due date. Reviewing both shows which customers need follow-up and which vendor payments need attention.
AR aging: which customers to chase
An AR aging report sorts unpaid invoices into 30-day buckets. Each bucket signals a different action:
Current: invoice sent, not yet due. No action needed.
1–30 days past due: send a reminder.
31–60 days past due: call the customer, get a specific payment date, and confirm it in writing.
61–90 days past due: escalate and pause new credit for that customer.
90+ days past due: treat as doubtful; decide on collections or a write-off.
Read the report by customer as well as by bucket. Several small overdue invoices from one customer can signal the same problem as one large invoice.
For balances you no longer expect to collect, your accountant may record an allowance for doubtful accounts. The allowance reduces the amount of AR you expect to turn into cash without removing each open invoice before you decide whether to write it off.
Relay Invoices lets you create and send invoices from the same banking workspace. You can also track their payment status there.
AP aging: which bills to pay next
An AP aging report groups bills by due date so you can see which ones need attention before they trigger late fees or damage vendor relationships. Before paying, check for:
Duplicate bills
Disputed amounts
Scheduled payments
Bills still awaiting approval
Prioritize approved bills by due date. Avoid paying earlier than necessary because holding onto cash longer improves working capital.
Managing customer credit and collections
Credit terms should reflect the customer's payment history and the amount you can afford to leave unpaid. A written escalation schedule keeps overdue follow-up predictable across every customer.
Setting credit terms for customers
Start new customers with a deposit or payment on delivery, then move them to invoiced terms after they've built a clean record.
For a large first order, collect a deposit at signing and another payment at an agreed midpoint. Invoice the remaining balance on completion. That way, no single unproven customer holds a big slice of your receivables.
Review the terms when payment behavior changes. A customer who repeatedly pays a Net 30 invoice after 60 days may need shorter terms, a larger deposit, or a temporary pause on new credit.
Collecting overdue invoices
Use the same sequence for every late invoice:
Day 1 past due: send an automated reminder with the invoice attached.
~2 weeks past due: make a personal call and frame it as an account check-in.
~30 days past due: send a formal past-due notice and pause new credit.
~60–90 days past due: offer a payment plan, or consider a collections agency or small claims court. Weigh invoice size against the relationship's value.
Assign the next escalation date before closing the account record. A promised payment date should lead to a scheduled follow-up so the invoice doesn't disappear between aging-report reviews.
A weekly rhythm for AR and AP
A fixed weekly schedule keeps invoices and bills from slipping between reviews. Use the same blocks each week:
Same day work ships: send the invoice, or hold to one fixed invoicing day per week.
Mid-week: work the AR aging report, oldest first.
One payables run per week: review every approved bill against its due date.
Friday: review both aging reports before committing to next week's spending.
Record the next action during each block so unresolved invoices and bills carry into the following review. This schedule also makes payment timing easier to compare because you review collections and obligations within the same week.
Reviewing AR and AP together
Relay Invoices tracks your receivables alongside the bills in Relay Bill Pay, so you can set a clear weekly spending rule: set the lowest cash level the business will allow, and stop discretionary spending below it. Reserve enough for payroll, rent, and other fixed obligations before deciding what remains available to spend.
When customer payments and vendor bills compete for the same cash, separate committed money before deciding what you can spend. Opening a Relay account gives you up to 20 checking accounts on the Starter and Grow plans, up to 50 on Scale, and two savings accounts for separating cash. Connect QuickBooks Online to keep transactions matched to your books.
Frequently asked questions
Is accounts receivable an asset or a liability?
Accounts receivable is an asset. It's classified as current when you expect to collect within one year (or your operating cycle, if longer), and it stays on your books until the customer pays, you write off the balance, or you otherwise remove the receivable.
Can the same transaction be both accounts receivable and accounts payable?
Yes. The seller records AR, while the customer records AP until payment.
Is invoicing accounts payable or accounts receivable?
It depends on which side of the invoice you're on. An invoice you send adds to your receivables, while a vendor invoice you receive adds to the amount your business needs to pay.
Do AR and AP exist under cash-basis accounting?
No. Cash-basis accounting recognizes income and expenses only when cash moves, so AR and AP aren't ledger accounts. You can still keep separate lists of unpaid invoices and upcoming bills to manage timing.
What is an AP aging report?
An AP aging report sorts unpaid bills by how close they are to their due dates. It shows which approved bills come first, flags overdue items, and identifies payments that can wait until their due dates. Partial payments leave the remaining bill balance open until you finish paying it.
