Accounts Payable Process and Accounts Receivable Explained
Accounts payable (AP) is money your business owes suppliers, and the accounts payable process is how bills get paid. Accounts receivable (AR) is money customers owe your business. On accrual-basis books, both are balances on the balance sheet. Managing them well means paying bills on time and collecting invoices promptly, so cash arrives before it is needed.
What is accounts payable?
Accounts payable is the total of bills you have received but not yet paid. If a supplier delivers materials on credit and sends an invoice, that invoice is a payable until you pay it.
It matters because each unpaid bill is a commitment. Late payment can cost you supplier goodwill, late fees or credit terms. Paying too early can strain cash. AP is the discipline of paying the right bills, the right amount, at the right time.
What is the accounts payable process, step by step?
The steps are similar in any size of business, though a small one may run them in a single afternoon.
- Receive the bill. It arrives by email, mail or a supplier portal. Record where it came from.
- Check it. Does it match what you ordered and received? Is the amount right? Is it a duplicate?
- Code it. Assign the expense to the right account, such as supplies, subcontractors or rent.
- Approve it. Someone with authority agrees that it should be paid. In a small business this is often the owner.
- Schedule payment. Choose the due date. Some businesses pay on terms rather than early.
- Pay it. By bank transfer, card or check, recording the payment against the bill.
- Record and file. The bill is marked paid and the document is stored.
- Reconcile. At month end, the payments should match the bank statement. See how to reconcile a bank account.
That is how the accounts payable process works in practice. The controls come from separating the steps: ideally the person who approves is not the person who pays.
What is accounts receivable?
Accounts receivable is the total of invoices you have sent but not yet been paid for. If you complete a job and invoice the customer, that invoice is a receivable until the money arrives.
On accrual-basis books, receivables are revenue you have earned but do not yet hold. A profitable business can still run out of cash if its receivables are slow. This is one reason profit and cash flow differ.
What is the accounts receivable process?
- Set terms. Agree payment terms before the work starts.
- Invoice promptly. An invoice sent late is paid late.
- Record it. The invoice goes into the books against the customer.
- Follow up. A reminder before and after the due date, in a polite and consistent routine.
- Receive and apply the payment. Match the payment to the invoice so the customer balance clears.
- Review the aging list. See which invoices are overdue and by how long.
- Decide on write-offs. If an invoice will never be paid, record that decision rather than leaving it in the books. Tax treatment is for your CPA or tax professional.
How are AP and AR different?
| Item | Accounts payable | Accounts receivable |
|---|---|---|
| Direction | Money you owe | Money owed to you |
| Counterparty | Suppliers, contractors | Customers |
| Balance sheet (accrual basis) | Liability | Asset |
| Cash effect | Cash goes out when paid | Cash comes in when collected |
| Main risk | Late or duplicate payments | Late or missed collection |
| Key report | Payables aging | Receivables aging |
Why do AP and AR matter for cash flow?
Because timing decides whether you can pay your own bills. Collecting receivables faster and paying payables on terms keeps cash in the account longer. Mismanaging either one creates a squeeze that profit alone does not solve.
Illustrative example with invented numbers. A business invoices a customer for 4,000 units of currency on the first of the month with payment due in thirty days. It buys supplies for 2,500 on the tenth, due in thirty days. If the customer's money arrives before the supplier's bill is due, the business is not squeezed. If the customer pays two weeks late and the supplier is paid on time, the business must cover the gap from its own cash, even though the 4,000 sale more than covers the 2,500 purchase.
What does a bookkeeper do with AP and AR?
A bookkeeper keeps both ledgers accurate: entering bills and invoices, recording payments, tracking aging and reconciling to the bank. English Oak offers AP and AR bookkeeping as part of its bookkeeping service, along with QuickBooks and Xero support. A fractional controller adds oversight of receivables and payables and cash management. For the wider picture see what a bookkeeper does.
What are common AP and AR mistakes?
- Paying the same invoice twice
- Coding bills to the wrong account
- Letting invoices sit unsent
- No routine for chasing overdue customers
- Bills paid from personal accounts
- Recording payments against the wrong customer
- Never reviewing the aging reports
Some trace back to a missing routine. Writing down the steps and who does each one helps.
Can you do AP and AR yourself?
Yes, if volume is small and you keep to a routine. The two limits are time and discipline. If the paperwork keeps slipping, or you cannot say who owes you money without searching, it is worth help. English Oak is based in Lehi and works locally, across Utah and remotely. See what we do and what outsourced accounting costs.
Tax treatment of these items is for your CPA or tax professional. English Oak does not prepare tax returns, audit or give investment advice.
What English Oak Financial charges
English Oak Financial starts bookkeeping from $500 a month. Pricing is custom to your business and charged as one fixed monthly fee that includes all the work required. See pricing.
Need this done for you? See our Bookkeeping service, or pricing. English Oak Financial does not prepare tax returns, perform audits or give investment advice. This guide is general information, not tax, legal or investment advice.
Related pages
Common questions
What is the accounts payable process?
It is the set of steps from receiving a supplier bill to paying it: receive, check, code, approve, schedule, pay, record and reconcile. Its purpose is to pay the right amount to the right party on time.
What is the difference between accounts payable and accounts receivable?
Accounts payable is money you owe. Accounts receivable is money owed to you. On accrual-basis books, one is a liability on the balance sheet and the other is an asset. On cash-basis books neither appears as a balance; see cash vs accrual accounting.
How does the accounts payable process work in QuickBooks or Xero?
Both let you enter and track bills and record payments. A person still has to check each bill and reconcile to the bank.
Who handles accounts receivable for a small business?
Often the owner or an office manager. A bookkeeper can record invoices and payments and report on overdue balances. English Oak offers accounts receivable bookkeeping.
Can a bookkeeper manage accounts payable and receivable for me?
Yes. English Oak offers AP and AR bookkeeping.
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