Accounts Payable vs Accounts Receivable: Explained Simply
Accounts payable (AP) is the money your business owes to suppliers for things you've bought on credit. Accounts receivable (AR) is the money customers owe your business for things you've sold on credit. Every credit invoice is AP for the buyer and AR for the seller at the same time.
AP vs AR at a Glance
| Accounts payable (AP) | Accounts receivable (AR) | |
|---|---|---|
| What it is | Money you owe suppliers | Money customers owe you |
| On the balance sheet | Current liability | Current asset |
| Created by | A supplier's invoice (a "bill" in Xero) | Your invoice to a customer |
| Key measure | Creditor days | Debtor days |
| Xero report | Aged Payables | Aged Receivables |
| Cash flow effect | Cash goes out when you pay | Cash comes in when they pay |
Worked Example: One Invoice, Both Sides
A Christchurch packaging manufacturer sells $11,500 (including GST) of printed boxes to an Ashburton food producer on 20th-of-the-month-following terms. The invoice is dated 8 March, so it's due 20 April.
| Date | Packaging manufacturer (seller) | Food producer (buyer) |
|---|---|---|
| 8 March | Raises the invoice. AR goes up $11,500 | Enters the bill. AP goes up $11,500 |
| 8 March to 20 April | Invoice sits in Aged Receivables as "current" | Bill sits in Aged Payables as "current" |
| 20 April | Payment received. AR goes down, bank goes up | Payment made. AP goes down, bank goes down |
Same document, same amount, same dates. The only difference is which side of the transaction you're on. If the food producer pays on 15 May instead, the seller's debtor days rise and the buyer's creditor days rise by exactly the same amount.
Why Both Matter for Cash Flow
Most businesses have both. A wholesaler owes its manufacturers (AP) while waiting on its retail and trade customers (AR). Cash gets tight when the AR side is slower than the AP side: you pay suppliers on the 20th but your own customers don't pay until well into the following month. Tracking both numbers together shows how big that gap is, and it's the core input to the cash conversion cycle.
Frequently Asked Questions
Is accounts payable an asset or a liability?
A liability. It's money your business owes and will have to pay out, usually within a few weeks, so it sits under current liabilities on the balance sheet.
Is accounts receivable an asset?
Yes, a current asset. It's money owed to you that you expect to collect within the year, although any invoice that is unlikely to be paid should be written down or written off.
What is the difference between a bill and an invoice in Xero?
They're the same kind of document seen from different sides. Xero calls an invoice you send a customer an invoice (accounts receivable) and an invoice you receive from a supplier a bill (accounts payable).
Can a business have more accounts payable than receivable?
Yes, and it's common in retail and hospitality, where customers pay at the till but suppliers give trade terms. It becomes a problem only if there isn't enough cash coming in to meet supplier due dates.
