What is accounts receivables (AR)?
Accounts receivable refers to the amount that a company is entitled to receive from its customers for goods or services sold on credit. In other words, it is the amount that your customer owes you with respect to contractual obligations.
Accounts receivables are also known as debtors, trade debtors, bills receivables or trade receivables.
Read more on Accounts Receivables – Definition, Example and Process
What is accounts payable (AP)?
Accounts payable is the money a business owes to its suppliers, shown as a liability on the balance sheet. In simple words, when you buy goods or services on credit, the unpaid amount is your accounts payable.
Accounts payable is also called bills payable. The total amount a company owes appears as a liability under the head 'sundry creditors' in the balance sheet.
What is the difference between accounts receivable and accounts payable?
Accounts receivable is money owed to your business by customers. Accounts payable is money your business owes to suppliers. Managing both well is crucial to assessing a company's financial health.
The two are recorded in similar ways, but on opposite sides of the balance sheet. Receivables are money owed to you, so they appear under assets. Payables are money you owe, so they appear under liabilities.
|
Accounts Receivables |
Accounts Payables |
|
Money owed to your business |
Money you owe to your supplier |
|
Current Asset |
Current Liability |
|
Sundry Debtors |
Sundry Creditors |
How to record accounts receivable?
Recording accounts receivable is simple with TallyPrime. When you sell goods or services on credit, TallyPrime tracks all your outstanding receivables automatically. You can then use the reports to follow up with parties and recover due amounts on time.
Here are the journal entries to record and adjust accounts receivable in the books of account:
When a sale is made on credit:
Deepak Sales Corporation (Customer): 4,83,800
Cr Sales a/c: 4,83,800
When a sale bill is paid:
Dr Bank/Cash a/c: 4,83,800
Cr Sundaram Pipes and Fittings a/c: 4,83,800
Once all the relevant ledgers of your accounts receivable have been recorded, you can view all your receivables at a glance. You can also change the view of these transactions as per your preference.
You can also view ledger-wise bills and understand the payment performance of your debtors and keep a track of your receivables to maintain optimum cash flow for your business.
How to record accounts payables?
The outstanding payables report in TallyPrime shows what your business owes for supplies, inventory, and services. You can see each creditor, how much you owe them, and how long the amount has been outstanding.
Managing your payables helps you track expenses, avoid missing payments, and manage your business cash flow.
When a purchase is made on credit:
Crompton Greaves Consumer Electricals (Supplier): 30,03,550
Cr Purchase a/c: 4,83,800
When the purchase bill is paid by you:
Dr Sundaram Pipes and Fitting a/c: 4,83,800
Cr Crompton Greaves Consumer Electricals (Supplier): 4,83,800
Like the receivables report, TallyPrime lets you choose the view you want. Pre-built configurations let you customise, analyse, and slice the reports the way you need.
You can view your credit period, maintain bill-wise vouchers for each party, and settle bills at a click. For large purchases paid in instalments, you can split the purchase into multiple bills. This helps you track each payment against its bill and manage your payables systematically.
Example of accounts receivable
Say Hinduja Traders pays 25,000 to Giri Enterprises on 15th August.
This amount is reduced from Hinduja Traders' account, leaving accounts receivable of 25,000.
Example of accounts payables
Until Giri Enterprises pays Falcom Traders, the ₹1,00,000 is accounts payable. It appears as a liability towards creditors in the balance sheet.
Here, till the date Giri Enterprises pays Falcom Traders, INR 1,00,000, it will be called as accounts payables and be shown as a liability towards creditors in the balance sheet.
Why Are Accounts Payable and Accounts Receivable Important?
- Maintains healthy cash flow and business stability
Accounts Receivable (AR) ensures timely inflow of money from customers, while Accounts Payable (AP) manages outgoing payments to suppliers. Together, they help maintain a balanced cash cycle and prevent liquidity issues.
- Improves financial planning and decision-making
Tracking AP and AR gives businesses a clear picture of outstanding liabilities and expected income. This helps in budgeting, forecasting, and making informed financial decisions.
- Builds strong vendor and customer relationships
Efficient AP ensures vendors are paid on time, improving credibility and negotiation power. Effective AR management reduces overdue payments and strengthens customer trust.
What’s the Relationship Between Accounts Payable and Accounts Receivable?
- They represent opposite sides of business transactions
Accounts Payable is the money a business owes, while Accounts Receivable is the money owed to the business. Both are interconnected and reflect the company’s financial obligations and earnings.
- Together, they define the working capital cycle
The timing gap between collecting receivables and paying payables directly impacts working capital. Efficient management ensures smooth operations without cash shortages.
- Balanced management ensures financial efficiency
Delayed receivables with immediate payables can strain finances. Aligning both cycles helps optimize cash flow and reduce dependency on external funding.
GAAP Compliance for Accounts Payable and Receivable
- Ensures accurate financial reporting and transparency
Under Generally Accepted Accounting Principles (GAAP), businesses must record AP and AR using the accrual basis of accounting. This ensures revenues and expenses are recognized in the correct period.
- Requires proper recognition and classification
Accounts Receivable should be recorded when revenue is earned, and Accounts Payable when expenses are incurred. Proper classification avoids misstatements in financial statements.
- Mandates provisions and reconciliations
GAAP requires businesses to account for doubtful debts (bad debts in AR) and regularly reconcile payables and receivables to ensure accuracy and compliance.
Why Managing AR & AP Matters
Effective AR/AP management directly influences the cash conversion cycle and overall working capital. Key metrics to watch:
- Days Sales Outstanding (DSO) – measures how quickly you collect receivables.
- Days Payable Outstanding (DPO) – measures how long you take to pay suppliers.
- Cash Conversion Cycle (CCC) = DSO + Days Inventory Outstanding – DPO.
Shortening DSO while extending DPO (without harming supplier relationships) improves liquidity.
Best Practices for AR & AP Management
- Reconcile AR and AP daily using TallyPrime’s aging reports.
- Set clear credit terms and communicate them to customers.
- Leverage early‑payment discounts with suppliers to improve DPO.
- Automate invoice generation and reminders to reduce manual effort.
- Regularly review cash conversion cycle metrics and adjust working‑capital policies.
Managing your receivables and payables helps your business maintain working capital. Receivables generate cash inflow and let you track the payment performance of your debtors. Paying your accounts payable on time builds strong vendor relationships and a good credit standing.
Keep your accounts receivable and payable steady with TallyPrime. Take a free trial today.
