Accounts payable and receivable: basic guide

When a business buys or sells on credit, the goods change hands but the money does not move at that moment. What remains is a commitment: either the company must pay later, or it has the right to collect later. That promise to pay is what accounting calls an account payable, and that right to collect is what is known as an account receivable. The two terms sound similar and are often confused, but they represent opposite sides of the same mirror. One is a debt of the company; the other is money that is owed to the company. Understanding that difference is essential for any business that buys or sells on credit, which in practice is almost every business. In this basic guide we explain what accounts payable and accounts receivable are, with clear examples, how they originate, why you must control them, and how they relate to your inventory.

What are accounts payable

Accounts payable are the money that a company owes to its suppliers and other creditors for goods or services it has already received but has not yet paid for. The most common situation is buying merchandise, raw materials, or services on credit: the supplier delivers the order and agrees to receive payment later, within an agreed term that usually ranges from 15 to 60 days. In accounting terms, accounts payable are a liability, meaning an obligation: they represent money that the company will have to take out of its cash or bank accounts in the future. As long as the invoice is unpaid, that obligation remains alive and is part of what the business owes. Typical examples of accounts payable include:

Purchases of merchandise or raw materials on credit: the supplier delivers the order with its invoice, and the company commits to paying within 15, 30, or 60 days.
Services billed on a deferred basis: transportation, maintenance, or professional services that are received first and paid for later.
Rent and utility bills: the lease of the premises or the electricity bill whose due date arrives after the service period.
Invoices from other creditors: smaller obligations to third parties, documented and pending payment.

It is worth clarifying that, in a broader sense, companies have other debts as well, such as bank loans, taxes, or salaries payable. However, in everyday language, when people talk about accounts payable they almost always mean the trade debts owed to suppliers for purchases made on credit, which is what this guide covers.

What are accounts receivable

Accounts receivable are the money that customers and other debtors owe to the company for merchandise sold or services provided on credit. It is the mirror image of the previous case: the company delivered the good or the service but has not yet received payment, and it holds the right to collect on the agreed date. In accounting terms, accounts receivable are an asset, because they represent a future economic benefit: the money that will come into the company when the customer pays. The most common form is the customer portfolio, that is, the sales invoices that have been issued but not yet collected. Common examples of accounts receivable include:

Credit sales to customers: the company delivers the merchandise, issues the invoice, and the customer commits to paying within a term of 15, 30, or 60 days.
Services rendered and billed: the work is delivered and the collection happens afterwards, as agreed.
Installment sales: the balance that the customer has not yet covered remains as an account receivable until the full amount is paid.
Other accounts receivable: advances to employees or loans made by the company are also collection rights, even though they do not come from sales.

How accounts payable and receivable originate

Both arise from the same economic event: a purchase or a sale on credit, backed by an invoice. When the company buys on credit, it receives the merchandise or the service today but does not pay today. The supplier's invoice remains as the supporting document for that obligation: it states how much is owed, to whom, and since when. That document is the origin of an account payable. When the company sells on credit, it delivers the merchandise or the service today but does not receive the money today. The invoice it issues is the support for its collection right: it states how much the customer must pay and on what date. That document is the origin of an account receivable. A key point is that trade credit should not be an informal arrangement. Without an invoice backing up the amount, the term, and the conditions, there is no reliable way to record the account, track it, or claim payment. The invoice is the memory of the commitment and should always be kept. It is also important to remember a basic accounting rule: recording a sale or a purchase on credit does not mean the money has already come in or gone out. The transaction is recognized when the good or service is delivered or received, and the money movement comes later, when it is paid or collected. That is why accounts payable and receivable exist: to reflect commitments that have not yet crossed paths with the cash register.

The life cycle of an account: from invoice to cash

Accounts payable and receivable follow a very similar cycle, seen from opposite sides:

Invoice: the supporting document of the transaction is created, with its amount, its date, and its term.
Recording: the invoice is entered into the records, identifying the supplier or the customer, the document number, and its due date.
Open status: as long as it is not paid or collected, the account remains open and is part of the outstanding balance.
Due date: the agreed date arrives for paying the supplier or for receiving payment from the customer.
Payment or collection: the account crosses with cash or the bank: money goes out if the company pays, or comes in if the company collects.
Closing: the account reaches zero, the outstanding balance decreases, and the supporting document is filed away for future reference.

The list looks simple, but in practice the due-date step is where many businesses fail: payments that go unnoticed, invoices that are forgotten, and collections that are never claimed. That is why an organized control system matters.

Why it is important to control them

Keeping good control of accounts payable and receivable is not an administrative luxury: it is a survival need for the business. These are the main reasons:

Protecting cash flow: knowing how much must go out and how much should come in over the coming weeks makes it possible to plan purchases, payroll, and expenses without running out of liquidity.
Avoiding late payments and interest: paying late generates surcharges and penalties, and damages the relationship with suppliers, who may suspend shipments or credit.
Collecting on time: every day an invoice stays overdue is working capital tied up; that money should be financing the operation, not trapped in receivables.
Not overpaying: without reliable records, there is a risk of paying duplicate invoices, wrong amounts, or items that had already been settled.
Making decisions with data: knowing how much is owed and how much is owed to the company makes it possible to negotiate better terms, request credit with solid grounds, and chase late-paying customers.

It is worth saying this clearly: a business can sell a lot and still face serious financial trouble. The profit shown on paper does not pay suppliers; cash does. Accounts payable and receivable are precisely the two faces of that liquidity, and neglecting them is one of the most frequent causes of crisis in small companies.

How to keep them under control

You do not need to be an accountant to keep a basic and useful record, but you do need order and consistency. These are the practices we recommend:

Record by third party and by invoice: instead of one single overall balance, identify each account with its supplier or customer and with its invoice number. That way you always know exactly which document is pending.
Write down the due date of every invoice: tracking by due date is what allows you to answer, at any moment, what must be paid this week and what should be collected.
Keep the balances up to date: each payment or collection is deducted from its corresponding invoice so that the outstanding balance always reflects reality.
Mark the status of each account: pending, overdue, paid, or collected. It is a good idea to review the accounts approaching their due date at least once a week.
Reconcile with the supporting documents: periodically compare what is recorded with the physical invoices and with the bank statements, to spot differences early.
Rely on your accountant: the final accounting classification, such as the period in which each transaction is recognized or the allowance for doubtful accounts, must be validated by a professional.

When the business handles only a few invoices a month, a spreadsheet can be enough. When the volume grows, it is better to use a system that lets you record, search, and filter accounts by supplier, by customer, and by due date.

Key differences: accounts payable vs. accounts receivable

There is nothing like seeing them side by side to fix the concepts:

Aspect	Accounts payable	Accounts receivable
What they represent	Money the company must pay to third parties	Money third parties must pay to the company
Whose side they are on	The company is the debtor to suppliers and creditors	The company is the creditor of customers and debtors
Accounting classification	Liability	Asset
Typical origin	Purchases of merchandise, raw materials, or services on credit	Sales of merchandise or services on credit
Effect on cash	When paid, money leaves the cash or bank accounts	When collected, money comes into the cash or bank accounts
Risk if not controlled	Late payments, interest, duplicate or excessive payments	Overdue receivables, customers who do not pay, lack of liquidity

The golden rule to avoid confusing them is to always ask who owes whom. If the company is the one that owes, it is an account payable and a liability. If the company is the one entitled to collect, it is an account receivable and an asset.

How they relate to inventory

For a business that handles merchandise, accounts payable and receivable are directly connected to inventory. The two most common credit transactions show it clearly:

Purchase on credit: inventory increases, because the purchased merchandise comes in, and at the same time an account payable to the supplier is created. When the account is paid, the money goes out and the obligation disappears; inventory does not move again because of that payment.
Sale on credit: inventory decreases, because the merchandise goes out with its cost, and an account receivable is created for the value of the sale. When the customer pays, the money comes in and the account receivable is closed.

There is an accounting detail worth understanding: a credit sale recognizes two things at the same time: the revenue from the sale and the cost of the merchandise delivered. That cost comes out of the inventory record, that is, the register of stock entries and exits. Therefore, if the inventory is not properly valued and controlled, the profit the business shows is not reliable either: accounts receivable, inventory, and the final result all depend on one another. When a company buys and sells on credit, the ideal situation is for the control of these accounts to go hand in hand with inventory control, because every purchase comes into the warehouse and every sale goes out of it. A system like Kardex Tauro integrates inventory control with an accounts payable and receivable module, so that each purchase or sales invoice is linked to its supplier or customer, with its due date and its balance, and it is always possible to know how much is owed, how much is owed to the company, and what is in the warehouse, all from the same place. Remember that this guide is informational and general: the accounting classification of each transaction in your business must be reviewed and validated by your accountant or accounting advisor, who knows the rules that apply to your specific case.

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