Accounts payable (AP) is the amount of money a business owes to its suppliers or creditors for goods or services purchased on credit. AP is recorded on a business’s balance sheet under current liabilities. Typically, accounts payable are short-term debts the business expects to pay within a year or within one operating cycle, whichever is longer.

Accounts receivable (AR), on the other hand, is the money owed to a business by its customers for goods or services delivered but not yet paid for. AR represents a line of credit extended by the business that is usually recoverable within a short period, such as 30, 60, or 90 days. On a business’s balance sheet, accounts receivable is listed as a current asset, indicating it is expected to be turned into cash within one fiscal year.

The formula for accounts receivable turnover ratio is:

Accounts Receivable Turnover Ratio = Net Credit Sales ÷ Average Accounts Receivable

This ratio measures how efficiently a company collects payments from customers. A higher ratio indicates the company collects cash quickly and has healthy cash flow, while a lower ratio might signal slow collections or overly lenient credit policies. What counts as a strong ratio can vary by industry.

Below, we’ll explain the differences between accounts payable and accounts receivable—in what they are and how the accounts are handled—as well as the best accounting practices, tools, and tips businesses can use to manage them. Here’s what you should know.

What’s in this article?

• What are the differences between accounts receivable and accounts payable?
  
• Accounts payable best practices
  
• Accounts receivable best practices
  
• How Stripe Revenue Recognition can help
  

What are the differences between accounts receivable and accounts payable?

Accounts receivable and accounts payable are important accounting concepts that often get confused, but they represent different parts of the accounting process. Here’s an explanation of their key differences:

What accounts receivable and accounts payable mean

• Accounts receivable: Money owed to your business by customers for goods or services they purchased on credit. You can think of it as money coming in.
  
• Accounts payable: Money your business owes to suppliers or vendors for goods or services purchased on credit. This is money going out.
  

How each appears on the balance sheet

• Accounts receivable: Considered a current asset on your balance sheet because it’s expected to be converted into cash within a year.
  
• Accounts payable: Considered a current liability on your balance sheet because it’s a short-term debt that must be settled within a year.
  

How transactions affect each amount

• Accounts receivable: Increases when you make sales and decreases when you collect payment in cash.
  
• Accounts payable: Increases when you make purchases and decreases when you make payments.
  

How AP and AR affect a business’s cash flow

Accounts receivable and accounts payable sit on opposite sides of a business’s cash flow equation. When customers take longer to pay their invoices, receivables increase, but there’s less cash in the business, which makes it harder to fund operations.

On the flip side, accounts payable gives a company breathing room—the longer it delays paying its own suppliers (within agreed terms), the more cash it retains in the short term. Managing both effectively is key: a healthy business collects receivables quickly while strategically timing its payables to keep cash flow as strong as possible.

Typical accounting balance for each account

• Accounts receivable: Normally has a debit balance, because in double-entry accounting, debits increase asset accounts. Since AR is an asset (money owed to you), it grows with each debit entry when a sale is made on credit.
  
• Accounts payable: Normally has a credit balance, because credits increase liability accounts. Since AP is a liability (money a business owes to others), it grows with each credit entry when a purchase is made on credit.
  

For example, if your business is a consulting firm that invoices a client after completing a project, the unpaid invoice is recorded as accounts receivable. If your business receives an invoice from a software provider or contractor and pays it at a later date, that unpaid bill is recorded as accounts payable.

Accounts payable best practices

When it comes to handling the accounts payable process, businesses can implement some accounting best practices to ensure accuracy and efficiency. Here’s a rundown:

Automate and streamline processes

• Invest in AP automation software with optical character recognition (OCR) for invoice processing, electronic workflow approvals, and automated three-way matching (such as BILL, Tipalti, or Rillion). Integrate OCR technology to convert different invoice formats into digital data.
  
• Implement a unified AP platform where all invoices can be uploaded, approved, and paid. Digital workflows route invoices to the correct personnel.
  
• Transition to a fully digital invoice processing system and encourage vendors to send electronic invoices with an online submission and tracking system.
  

Manage suppliers and payments strategically

• Conduct periodic performance reviews with key suppliers. Negotiate terms that include extended payment periods, volume discounts, or improved pricing in exchange for prompt payments. Also ask suppliers to offer discounts for early payments.
  
• Implement a sliding scale for dynamic discounts where the rate varies based on how early payment is made. Use AP software to automatically offer options based on predefined criteria.
  
• Work with suppliers to extend payment periods to improve cash flow. Incorporate negotiated terms into your AP system for automatic compliance and scheduling.
  
• Use virtual cards for B2B payments, which provide a secure, one-time-use number per transaction and offer rewards such as cash back or travel points.
  

Maintain control and compliance

• Regularly update and test internal controls, including the segregation of duties. Confirm compliance with global financial regulations including Anti-Money Laundering (AML) checks.
  
• Define specific roles within the AP department, implement automated approval workflows, and regularly train AP staff on software and updated procedures.
  
• Regularly reconcile AP records with bank statements and general ledger entries, using reconciliation tools within your AP software to automate parts of the process.
  
• Closely monitor metrics such as days payable outstanding (DPO), which is how long a company takes to pay its suppliers, cost per invoice, and the percentage of invoices processed electronically to identify trends and areas for improvement.
  

Use technology and data

• Implement machine learning to analyze historical payment data, predict optimal payment times, and identify patterns that could indicate errors or fraud. AP fraud can occur through fake invoices, duplicate payments, or vendor manipulation.
  
• Regularly generate reports on key AP metrics such as DPO, average processing time, and percentage of invoices processed without human intervention. Use trend analysis to adjust staffing or payment strategies and integrate AP data into the company’s wider financial system.
  
• Explore financing or factoring options where appropriate. Factoring gives you immediate cash because you sell your receivables to a third party. But the third party, known as a factor, takes a fee, so you collect less than the full invoice value.
  
• Move AP operations to a cloud-based platform and choose AP automation software with electronic invoicing, automated workflows, and real-time reporting that integrates with existing financial systems.
  
• Stay informed about emerging technologies such as artificial intelligence (AI) for intelligent invoice matching or blockchain for secure transactions. Consider pilot programs before launching a full implementation.
  

Accounts receivable best practices

Ensuring your accounts receivable process runs smoothly can save your business time and prevent inaccurate financial reports. Here’s an overview of how to best manage accounts receivable:

Automate invoicing and payment reminders

• Shift to e-invoicing platforms for more efficient invoice delivery, incorporating automated data capture and OCR technology to reduce errors. Implement systems that integrate with sales and service platforms for real-time invoicing.
  
• Design invoices for clarity with prominent due dates and clear payment instructions. Use varied delivery channels such as email and online portals to match customer preferences and guarantee immediate receipt.
  
• Schedule automated reminders by email or SMS as due dates near to minimize late payments and analyze customer responses to adjust reminder strategies accordingly.
  
• Implement automated payment plans and self-service portals to make paying easy. Explore AI and machine learning solutions for more sophisticated customer interaction strategies.
  

Manage customers and credit effectively

• Group customers based on their payment history and creditworthiness, using data for precise segmentation. Customize your collection strategies and credit terms to each segment to reflect their risk profile and value.
  
• Implement sliding scale discounts or rewards for early payment and automate this process in your AR system.
  
• Accept a variety of payment options, including online portals, credit cards, ACH transfers, and installment plans, and integrate them into your AR system.
  
• Focus initial collection efforts on high-value accounts with a history of late payments by using predictive analytics to guide prioritization. Balance collections with maintaining customer relationships.
  

Streamline collections and maintain relationships

• Start with friendly reminders, escalating to more assertive measures as needed.
  
• Engage proactively with customers, especially those facing payment challenges, to find mutually beneficial solutions. Use customer relationship management (CRM) platforms to manage and document interactions for a personalized and informed strategy.
  
• Inform customers about their account status and any collection actions taken.
  
• Develop loyalty programs or special discounts for consistent and timely payments and integrate these incentives into the AR strategy.
  

Use data and analytics

• Gather customer data across systems to facilitate efficient communication and analysis. Use cloud-based solutions for centralized data management and accessibility.
  
• Monitor metrics such as days sales outstanding (DSO), collection success rates (with the goal of improving AR collection times), and write-off percentages. Regularly report on these to assess the effectiveness of AR strategies and make data-driven decisions.
  
• Use data to analyze payment trends and customer behavior. Apply these insights to refine collection strategies, credit policies, and customer engagement.
  

Accurately recognize and record accounts receivable

• Record receivables immediately upon the delivery of goods or services so your balance sheet reflects true outstanding obligations and revenue is recognized in the correct period.
  
• Reconcile AR balances regularly against the general ledger and customer statements to catch discrepancies early and maintain accurate financial reports.
  
• Maintain an aging schedule that categorizes outstanding invoices by how long they've been unpaid to give stakeholders a clear picture of collection risk.
  
• Conduct periodic write-offs of genuinely uncollectible accounts in a timely manner to prevent overstating assets and document the process thoroughly.
  

How Stripe Revenue Recognition can help

Stripe Revenue Recognition turns complex accrual accounting calculations into automated reports. Close your books same-day, accurately, and in line with IFRS 15 and ASC 606 standards directly from the Stripe Dashboard.

Revenue Recognition can help you:

• Gain a centralized view of your revenue: In the Stripe Dashboard, see all your Stripe transactions and imported non-Stripe data and terms.

• Automate for your pricing model: Recognize revenue across 15+ pricing models — no code needed.

• Customize for your business: Create and automate custom rules to recognize revenue, in line with your business’s accounting practices.

• Audit in real time: Close your books faster with traceable, ready to use AR reports, revenue waterfalls and financial statements.

Learn more about how Revenue Recognition can help you comply with global accounting principles, or get started today.