What Is Accounts Payable and Accounts Receivable?
Learn the difference between accounts payable and accounts receivable, why they matter for cash flow, and how QuickBooks helps small businesses stay organized.
Andrew Kim
10/20/20263 min read
What Is Accounts Payable and Accounts Receivable?
Running a small business involves more than earning revenue and paying bills. You also need to keep track of money your business owes and money customers owe you. This is where accounts payable and accounts receivable come in.
Understanding the difference between these two concepts can help you manage cash flow, stay organized, and make better financial decisions.
What Is Accounts Payable?
Accounts payable (AP) is the money your business owes to suppliers, vendors, or other service providers for goods and services you have received but have not yet paid for.
For example, imagine you hire a web designer to update your business website. The designer sends you an invoice for $800 with payment due in 30 days. Until you pay that invoice, the $800 is recorded as accounts payable.
Common examples of accounts payable include:
Office supplies purchased on credit
Software subscriptions billed monthly
Contractor invoices
Utility bills that have not yet been paid
Professional service fees
Keeping track of accounts payable helps you avoid late payments, maintain good relationships with suppliers, and plan for upcoming expenses.
What Is Accounts Receivable?
Accounts receivable (AR) is the money customers owe your business for products or services you have already provided but have not yet been paid for.
For example, suppose you provide bookkeeping services to a client and send them an invoice for $500. If the client has 15 days to pay, the $500 remains in accounts receivable until payment is received.
Common examples of accounts receivable include:
Unpaid client invoices
Consulting fees awaiting payment
Completed projects billed to customers
Services provided under payment terms
Managing accounts receivable helps you follow up on overdue invoices, collect payments promptly, and maintain enough cash to cover your business expenses.
Accounts Payable vs. Accounts Receivable
Although the terms sound similar, they represent opposite sides of your business finances.
In simple terms, accounts payable tracks what you need to pay, while accounts receivable tracks what you need to collect.
Why Are Accounts Payable and Accounts Receivable Important?
Both play an important role in managing your business finances.
1. Better cash flow management
Knowing which bills are coming due and which customers still owe you money helps you plan ahead. Even a profitable business can experience cash flow problems if customers pay late while expenses continue to accumulate.
2. Fewer missed payments
Tracking accounts payable helps you stay on top of due dates and avoid unnecessary late fees or disruptions to essential services.
3. Faster customer payments
Monitoring accounts receivable allows you to identify overdue invoices and follow up with customers before outstanding balances become a bigger problem.
4. More accurate financial records
Recording unpaid bills and outstanding customer invoices correctly helps ensure your financial reports reflect what your business owes and what it is entitled to collect.
5. Better business decisions
Understanding your outstanding obligations and expected payments gives you a clearer picture of your financial position when deciding whether to make a purchase, hire help, or take on additional work.
How Does QuickBooks Help Manage Accounts Payable and Accounts Receivable?
Accounting software such as QuickBooks Online can make it easier to track money owed and money due.
For accounts payable, QuickBooks can help you record supplier bills, track payment due dates, and record payments when they are made.
For accounts receivable, you can create customer invoices, monitor outstanding balances, record incoming payments, and identify overdue invoices.
Keeping these records current helps you maintain more organized books and gives you a clearer view of your business finances.
However, accounting software still requires accurate information and regular review. Transactions need to be recorded correctly, payments matched appropriately, and discrepancies investigated.
Do Small Businesses Need to Track Both?
Yes. Even if you operate a small business with only a handful of clients and suppliers, tracking accounts payable and accounts receivable can make managing your finances much easier.
If you primarily receive payment immediately and pay expenses as they arise, you may have very few outstanding balances. However, once you begin invoicing customers or receiving bills with payment terms, keeping track of these amounts becomes increasingly important.
Regular bookkeeping helps ensure outstanding invoices, unpaid bills, and payments are recorded accurately.
Keep Your Business Finances Organized
Managing accounts payable and accounts receivable does not have to be complicated, but it does require consistency. Staying on top of unpaid bills and outstanding invoices can help you avoid surprises, improve cash flow, and keep your financial records organized.
At YEG Bookkeeping, we help Edmonton small businesses maintain accurate QuickBooks Online records, track expenses, reconcile accounts, and prepare useful monthly financial reports.
If you need help keeping your books up to date, visit yegbookkeeping.ca to learn more about our bookkeeping services.
