What are accounts payable? 

Accounts payable are short-term obligations (typically due within 30 days but subject to contract) owed by a business to vendors offering credit terms on invoices for purchased goods or services. Accounts payable (AP) are a current liability on the company’s balance sheet. 

Another way of putting it is that accounts payable are unpaid vendor invoices for short-term debts scheduled for later payment. 

Consider accounts payable as an end-to-end process that:

• Begins with invoice receipt and matching with purchase orders and goods receipt
• Applies invoice processing like checking for accuracy, duplicates, and supplier authenticity
• Matches invoices by line item with purchase orders and receiving reports 
• Obtains invoice approvals for payment 
• Makes invoice payments to vendors

This accounts payable process works best with an automated AP flow for invoice processing. Automated AP workflow software will improve your company’s bottom-line profitability and optimize cash flow. 

What are some accounts payable examples? 

Accounts payable examples, by types of accounts for expenditures, include:

• Inventory purchases
• Office supplies 
• Business travel expenses
• Manufacturing supplies 
• Office equipment purchases (fixed assets)
• Late payments, which entail additional costs in the form of late fees due after the initial due date
• Anything with an invoice, like software, consulting fees, etc. 

How to record accounts payable 

Record accounts payable using GAAP (generally accepted accounting principles) rules of accrual accounting and double-entry bookkeeping. Use an integrated accounting or ERP system and AP automation software to perform your accounting processes efficiently and effectively. 

In GAAP accounting, according to the FASB Conceptual Framework, accrual accounting is used to record revenue and expense when the transactions occur rather than when an invoice is paid in cash for goods or services received. 

Between receiving the goods or services for which a company is invoiced and when the invoice is paid, the transaction is recorded to a balance sheet account called accounts payable. 

To record accounts payable invoices with credit terms:

1. Credit the invoice balance due to accounts payable and debit the applicable expense, inventory, or fixed asset account.
2. Upon invoice payment, debit the accounts payable account and credit cash. Instead, credit the early payment discounts account and credit the lower cash and accounts payable balances if taking prompt payment discounts. 
3. Debit accounts payable and credit the account category of the expenditure for credit memos issued by vendors for returned items or price and quantity differences that lower the amount owed. 

Purchases of inventory and fixed assets or other equipment are capitalizable assets on the balance sheet rather than expenses. 

In traditional core accounting software, vendor invoices and credit memos are entered into the accounts payable module. Invoice balances are paid when due. Each vendor's accounts payable aging report in detail or summary format is created by date. 

Accounts payable journal entries

Using double-entry bookkeeping, an accounts payable journal entry is automatically made for the month when the accounts payable subsidiary ledger is posted to the general ledger for the month-end accounting close to prepare financial statements. 

This AP journal entry records expenditures by category on the debit side of the journal entry and total accounts payable (a liability account) for these expenditures as a credit. Payments reduce accounts payable as a debit and credit cash. 

Credit memos from the vendor reduce accounts payable as a debit and credit the related expenditures. Accounts payable has a credit balance in the general ledger because unpaid invoices are a current liability. A current liability means short-term liabilities,  with payment terms due within 12 months.

AP accounting isn’t hard once you understand the basics. However, the recorded number of accounts payable must be reconciled to the general ledger monthly to detect and correct any errors in initially recording accounts payable. 

It’s important to make corrections through the system and as a journal entry. 

For this reason, it’s better to use an AP automation system that automatically records and reconciles accounts payable and payments in real-time. 

If your current job is on the accounts payable team or you need to prepare to interview for an accounts payable job, understand these basic bookkeeping and accounting concepts and communicate well to maintain or make a good impression. 

The role of the accounts payable department is to handle invoice management, invoice processing steps, and payments on a timely and accurate basis and to record vendor invoices and credit memos in the system to determine the accounts payable balance in the general ledger. 

The AP team also communicates payment status to vendors. 

Did you know? Rho AP is designed to automate the AP process for you, integrating with your company’s ERP (enterprise resource planning) software (like NetSuite integration) to also streamline the accounting processes involved with managing payments. 

Financial statements

After posting transactions and journal entries to the general ledger to finalize a monthly or year-end accounting close, the accounting system will prepare a trial balance and financial statements for your review. Financial statements include the income statement, balance sheet, and cash flow statement. 

Income Statement and Balance Sheet

For accounts payable items purchased, expenses flow to the income statement. Accounts payable are current liabilities; inventory and fixed assets are included as current assets on the balance sheet. 

For accounts receivable, sales and other revenues are on the income statement. Accounts receivable is a current asset on the balance sheet showing net of the allowance for doubtful accounts. 

Now, let’s extend the symmetrical but opposite pattern of accounts payable vs. accounts receivable to the cash flow statement. Business owners and the accounting and finance team prepare business cash flow statements for their actual cash flow in financial statements. 

They also project cash flow using cash flow statements in the forecasting and budgeting process to ensure they have a healthy cash flow and obtain financing when needed. 

Cash flow statement

The accounts payable balance and the accounts receivable balance both play a role in completing the indirect cash flow statement, as net income is reconciled to cash flow from operating activities. The cash flow statement considers cash outflows as negative items and cash inflows as positive items. 

Most companies use the easier (GAAP-acceptable) indirect method of preparing the cash flow statement that begins with Cash Flow from Operating Activities. 

Sections for Cash Flow from Investing Activities and Cash Flow from Financing Activities follow, as do Beginning and Ending Cash and Cash Equivalents balances. 

Companies also disclose their restricted cash and some non-cash items when preparing a cash flow statement. 

Another acceptable choice for preparing the statement of cash flows is the direct method, which starts with the beginning cash and cash equivalents balance and directly adjusts by line item categories for cash receipts and disbursements to reach the ending cash and cash equivalents balance. 

Within the operating activities section of the cash flow statement, the indirect method starts with Net income (loss). It adjusts that amount for non-cash categories, including depreciation and changes in working capital component balances like accounts receivable, inventory, and accounts payable. 

The following table shows the impact of changes in accounts payable vs. accounts receivable balances on cash flow from business operations.

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Further proving our point of symmetrical opposites: On the cash flow statement, balance changes in accounts payable have an opposite effect compared to balance changes in accounts receivable. 

What are accounts receivable? 

Accounts receivable are the balances due to a company whose customers have not yet paid for purchases on credit that have been delivered to the customer and invoiced. 

Accounts receivable (AR) are current assets on the balance sheet for amounts customers owe to a business for items or services purchased. 

Accounts receivable accumulate balances due on invoices for sales or services on credit (less credit memos) for which cash hasn’t yet been received from the customer. If properly collected, they represent future cash inflows.

What are some accounts receivable examples? 

Examples of accounts receivable in the receivable process are:

• Sales invoices billed but not yet collected in cash
• Service invoices billed but not yet collected in cash
• Reductions for credit memos issued for returned goods
• Reduction to AR through journal entries using an accounts receivable contra-account for the Allowance for Doubtful Accounts (that estimates uncollectable accounts receivable)

How to record accounts receivable 

To record accounts receivable invoices with credit terms:

1. Debit the customer invoice balance due to accounts receivable and credit the applicable net sales or service revenue.
2. Upon invoice cash receipt, credit the accounts receivable account and debit cash.  Instead, debit the early payment discounts account, debit cash, and credit the accounts receivable balance if the customer has earned and taken a discount. 

In the core accounting system, customer invoices and credit memos are entered into the accounts receivable module, and balances are receivable in cash (or credit card) when due. An accounts receivable aging report by detail or summary is created by date. 

A journal entry is automatically made for the month when the accounts receivable subsidiary ledger is posted to the general ledger for the month-end accounting close to prepare financial statements. This process is very similar to the one used for accounts payable. 

As a symmetrical opposite to accounts payable, accounts receivable usually have a debit balance that’s a current asset on the balance sheet.

Accounts payable vs. accounts receivable 

Although accounts payable and accounts receivable are both balance sheet accounts to accumulate invoices with credit terms, the primary difference in accounts payable vs. receivable is that accounts payable relates to vendor invoices requiring payment when due. 

In contrast, accounts receivable refers to customer invoices for which cash will later be received. 

Key differences 

Here is how to differentiate between accounts payable vs. accounts receivable quickly:

• Accounts payable relates to a vendor invoice; accounts receivable relates to a customer invoice with credit terms. 
• Accounts payable relates to purchased expenditures on credit; accounts receivable relates to revenues. 
• Accounts payable is a current liability; accounts receivable is a current asset.
• Cash is paid for accounts payable; cash is received for accounts receivable. 

What's the relationship between accounts payable and accounts receivable? 

The relationship between accounts payable and accounts receivable is that both accumulate unpaid invoices and are balance sheet accounts.

Accounts receivable invoices will be due to the company from paying customers with credit terms; accounts payable invoices will be due for payment by the company to suppliers. 

Both accounts payable and accounts receivable subsidiary ledgers are formatted as aging reports by vendor or customer, showing columns for amounts past due in time intervals and totals. 

AP vs. AR metrics 

Controlling accounts receivable and accounts payable includes using metrics based on ratios. Here, the similarities are in play. 

The following AP vs. AR metrics are ratios for measuring accounts payable turnover or accounts receivable turnover and assessing liquidity in terms of the ability to pay current amounts owed by a business. 

AP turnover ratio vs. AR turnover ratio 

The accounts payable turnover ratio vs. accounts receivable turnover ratio is a computation to measure how many times invoices are paid in accounts payable or collected in accounts receivable during the measured period. 

AP turnover is calculated as Net credit purchases divided by Average accounts payable. With an accounts payable turnover of 7 for the year, vendor invoices on credit are paid on average every 1.7 months (which equates to every 51 days). 

AR turnover is calculated as Net credit sales divided by Average accounts receivable. Average accounts receivable is computed as (Beginning accounts receivable + Ending accounts receivable) divided by 2 for the measured accounting period. 

DPO vs DSO 

DPO vs. DSO is the turnover ratio metric for accounts payable vs. accounts receivable to measure the number of days invoices are outstanding. DPO is days payable outstanding. DSO is days sales outstanding. 

For a year, DPO is calculated as (Average accounts payable divided by Cost of goods sold) x 365 days. Annual DSO is calculated as (Average accounts receivable divided by Net credit sales) x 365 days. 

If DPO and DSO are calculated every month to view recent trends, use 30 days instead of 365 days and average the accounts payable and accounts receivable balances as (beginning of month + end of month balance) divided by 2.

Notice that the accounts payable and accounts receivable turnover are measured as the number of times. 

In contrast, the Days Payable Outstanding and Days Sales Outstanding are measured as the number of days. In the simplest terms, conceptually, you can think of these ratio formulas as being reciprocals. Elements of the formula calculation are changed depending on the ratio format desired. 

Liquidity ratios: the quick ratio and the current ratio 

The quick ratio and the current ratios are liquidity ratios, with the quick ratio being a stricter measure that leaves inventory, a slower-turning current asset, out of the ratio calculation formula. The current ratio measures whether current assets can cover paying current amounts owed (when converted to cash).  

The Current ratio formula is Current assets divided by Current liabilities. 

The Quick ratio formula is (Current assets minus Inventory) divided by Current liabilities. 

Conclusion: Accounts payable vs. accounts receivable

Accounts payable vs. accounts receivable are vendor payment vs. customer collection opposites for total unpaid balances due on invoices. 

This article provided accounts receivable and accounts payable definitions and examples. It also explained accounting for accounts payable and accounts receivable and ratios. 

Understanding differences in AP and AR, the accounts payable process, bookkeeping, and GAAP accounting for accounts payable and receivable help you perform better as a member of your company’s accounting & finance organization. 

Get started by considering Rho’s AP automation software to streamline your company’s accounts payable performance and make efficient global payments with Rho’s free financial platform.  

FAQ: Rho AP

What is Rho AP? 

Rho AP executes the entire payable lifecycle with one click, processing thousands of supplier invoices in seconds and at scale.

Rho AP starts by capturing bill data sourced from invoices or your ERP, then schedules thousands of corresponding payments using supported payment methods (ACH, card, checks, and wires) in seconds. 

With each step, Rho’s multi-level approval routing process controls prevent out-of-policy spend.

Content reviewed by Bryce Armbruster, Controller at Rho.