Managing accounts payable (AP) and accounts receivable (AR) is crucial to running any business. Indian startups rely on steady cash flow, so understanding how money flows through AP and into AR helps them maintain financial stability and support growth.
AP and AR reflect two sides of a company’s financial health. AP shows short-term liabilities, and AR shows expected income. If startups are poorly managed, they can face cash shortages, credit issues, and operational disruptions. This guide serves as a comprehensive resource for founders and finance teams, offering practical examples in INR, comparison tables, automation strategies, and actionable tips tailored for Indian businesses to better manage AP and AR.
Key Takeaways Accounts payable show what you owe your vendors, and accounts receivable show what customers owe you. Once you see this contrast, it becomes clear that both are equally important for maintaining steady cash flow. And because AP shapes your vendor relationships while AR shapes your customer relationships, each side needs careful attention. When either side becomes unbalanced, your business can face liquidity issues that slow down operations. This is why automation helps so much: it reduces errors, saves time, and keeps both processes running smoothly. And for Indian businesses, the story becomes even stronger with the right tools, which is why Mysa simplifies GST, TDS, RCM, and MSME compliance while streamlining AP. Accounts Payable Meaning Accounts payable refers to the money a company owes to its vendors for goods or services received on credit. It is a current liability and is typically due within one year. Companies use accounts payable to manage their short-term debts and ensure they have the funds available to pay their vendors on time. The accounts payable process involves recording invoices, verifying the accuracy of the invoices, and making payments to vendors.
Understanding the Nature of AP While a mortgage might be the first example that comes to mind for liabilities, AP is more relevant to everyday business operations. Every time your startup receives goods or services from a supplier on credit, an AP entry is created. This ensures transparency and facilitates timely payments, both of which are crucial for maintaining positive vendor relationships.
Key Characteristics of AP Liability Account: AP sits on the balance sheet as a liability, reflecting the company's financial responsibility to settle these debts.Short-Term : Unlike long-term debt, such as mortgages, AP typically involves payments due within a year, such as net-30 or net-60 terms offered by vendors.Common Examples of Accounts Payable Inventory Purchases: The cost of raw materials or finished goods acquired from suppliers on credit.Operating Expenses : Recurring costs like rent, utilities, and office supplies purchased on credit.Accrued Expenses : Expenses incurred but not yet invoiced, such as salaries or interest payable.Short-Term Loans : Liabilities arising from borrowing from banks or other financial institutions to meet short-term funding needs.Accounts Payable Journal Entry Example To understand how accounts payable works in real business scenarios, consider your startup purchases inventory worth ₹50,000 from a vendor on credit. Since the goods are received immediately, but the payment will be made later, this transaction creates an accounts payable entry.
In accounting terms, the inventory you receive increases your assets, while the unpaid amount increases your liabilities. The journal entry at the time of purchase would look like this:
Date
Account
Debit (₹)
Credit (₹)
DD/MM/YYYY
Inventory
50,000
—
DD/MM/YYYY
Accounts Payable
—
50,000
This entry records the increase in inventory (debited) and the corresponding increase in the amount you owe the vendor (credited).
Later, when your startup pays the vendor, the accounts payable balance must be cleared, and the cash or bank balance must be reduced. The journal entry at the time of payment appears as follows:
Date
Account
Debit (₹)
Credit (₹)
DD/MM/YYYY
Accounts Payable
50,000
—
DD/MM/YYYY
Cash / Bank
—
50,000
This entry removes the liability by debiting accounts payable and reflects the outflow of money by crediting cash or bank. Together, these entries show how accounts payable move through a business:
First, increasing when goods or services are taken on credit Then, it decreases when payment is made This illustrates the practical flow of AP in everyday operations.
Steps in the Accounts Payable Cycle The five key stages in the accounts payable process Proper AP management goes beyond just paying bills. It's a streamlined process that ensures good supplier relationships, avoids financial penalties, and capitalizes on potential savings. Here's a breakdown of the key steps involved:
Step 1: Purchase Orders (POs) Issue and Acceptance The AP cycle starts with a formal agreement. Once a vendor is selected, a purchase order (PO) is issued. This document outlines the agreed-upon terms, including:
Itemized list of goods or services required Quantity and specifications Unit price and total cost Delivery deadlines Payment terms (e.g., early payment discounts) Step 2: Receiving Goods or Services & their Inspection The vendor ensures goods or services are delivered as per the PO's timeframe. Clear communication keeps the procurement team informed about order progress. Upon delivery, the receiving department meticulously inspects the goods or verifies service completion against PO specifications. This includes checking quantity, quality, and accompanying documentation (packing slips, invoices).
Step 3: Invoice Processing The AP department receives the invoice from the vendor. It should detail the provided goods or services, quantity, unit price, total amount due, payment terms, and vendor banking information.
The AP team meticulously scrutinizes the invoice for accuracy and completeness. A crucial step involves a three-way match to ensure consistency between:
The original purchase order (PO) The receiving report confirming the delivered goods/services quantity and quality The vendor's invoice Step 4: Releasing Vendor Payment post Approval Workflow and Scheduling Once the three-way match is verified, the invoice is routed through a pre-defined approval workflow. Depending on the organization's size and spending limits, different levels of authorization may be required.
Upon approval, the AP team initiates payment to the vendor using the preferred method outlined in the PO (e.g., check, bank transfer, electronic payment). Early payment discounts can be factored in, and payment schedules are maintained to ensure timely settlements.
Step 5: Reconciliation and Reporting: Accuracy and Control The AP team conducts regular reconciliations of vendor accounts to verify that payments are processed within agreed-upon terms and to avoid late fees or penalties. Discrepancies are promptly identified and resolved.
Timely and accurate financial reporting relies on meticulous AP data. Processed invoices feed into the general ledger, ensuring a clear and comprehensive picture of the company's financial health.
What is Accounts Receivable? Accounts Receivable (AR) refers to the amount of money 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 in respect of contractual obligations. Accounts receivable are also known as debtor, trade debtors, bills receivable, or trade receivables.
AR is an essential component of a company's working capital, as it represents cash inflows that are yet to be realized.
Understanding The Nature of AR AR reflects the credit sales your company makes. When you deliver goods or services and allow customers to pay later, an AR entry is created. This creates a temporary increase in your assets, as the cash is yet to be received. Effective AR management ensures timely customer payments, which is crucial for maintaining a healthy cash flow.
Key Characteristics of AR Asset Account: AR signifies a company's claim to future cash inflows. These inflows are expected to be received within a year, making them current assets.Common Examples of Accounts Receivable Sales Invoices: The primary source of AR, these invoices represent the amount customers owe for products or services purchased on credit.Interest Receivable: This arises from investments made by the company, where interest payments are expected in the near future.Accounts Receivable Journal Entry Example To illustrate how AR works in real accounting, consider a scenario where your company sells goods worth ₹75,000 to a customer on credit. Since the payment will be collected later, this creates an accounts receivable entry and increases your assets.
The journal entry at the time of sale is as follows:
Date
Account
Debit (₹)
Credit (₹)
DD/MM/YYYY
Accounts Receivable
75,000
—
DD/MM/YYYY
Sales Revenue
—
75,000
This entry records the amount owed by the customer (debited to AR) and the revenue earned by your business (credited to Sales Revenue).
Later, when the customer pays the outstanding amount, the accounts receivable balance must be cleared, and the corresponding cash inflow recorded. The journal entry appears as follows:
Date
Account
Debit (₹)
Credit (₹)
DD/MM/YYYY
Cash / Bank
75,000
—
DD/MM/YYYY
Accounts Receivable
—
75,000
This clears the customer’s outstanding balance by crediting AR and increases your cash or bank balance by debiting it.
Steps in the Accounts Receivable Cycle The five steps in the accounts receivable cycle Similar to the AP process, effective AR management is a well-oiled machine that ensures timely customer payments and a healthy cash flow. Here's a breakdown of the key steps involved:
Step 1: Credit Assessment Unlike AP, where you pay established vendors, AR involves extending credit to customers. Therefore, the first step is assessing their creditworthiness. This is especially crucial for significant transactions or extended payment terms.
New Customers: Implement a formal credit application process that aligns with your company's credit policy. This might involve reviewing financial statements and payment history to minimize risk.Existing Customers: Periodically review creditworthiness for existing customers, especially if their purchase volume or payment behavior changes.Step 2: Invoice Dispatch The invoice serves as the official record of a customer's purchase, outlining the amount owed and the due date. The faster you send it, the sooner your payment terms begin. Consider automating this step for efficiency.
Step 3: Collections Management Late payments are a reality. A structured collections process helps you follow up with customers who have outstanding invoices. The frequency and nature of these follow-ups depend on the customer's payment history and the amount due.
Step 4: Payment Processing Businesses offer various payment options, including:
ACH or EFT Wire transfer Credit/Debit cards Checks Efficiently processing these payments is essential for accurate financial records. For online payments, you'll need a payment processor, gateway, and merchant account .
Step 5: Cash Application Once a payment arrives, it needs to be applied to the corresponding invoice. However, missing remittance information or discrepancies can create challenges.
Step 6: Dispute Resolution Invoice disputes can significantly delay payments. Promptly address customer issues to prevent further delays and maintain good relationships.
The Relationship between Accounts Payable vs Accounts Receivable Accounts Payable (AP) and Accounts Receivable (AR) are like two sides of the same coin in the world of business finance. They're inherently linked, performing a delicate dance that ensures a company's financial health. Let's delve into their interconnected nature:
Every business transaction involving credit creates corresponding entries in the accounts of both the buyer and seller. Imagine Company A selling merchandise on credit to Company B. Here's the beautiful symmetry at play:
1. Sale on Credit: Company A (Seller): Records the sale with a debit to Accounts Receivable (a current asset) and a credit to Sales Revenue. Essentially, they're creating a record of the money owed by Company B. Company B (Buyer): Records the purchase with a credit to Accounts Payable (a current liability) and a debit to Inventory or Expenses. Company B acknowledges the debt they owe to Company A. 2. Payment Settlement: Company A (Seller): Upon receiving payment, they debit Cash (an asset) and credit Accounts Receivable, reflecting the settlement of the debt. Company B (Buyer): They debit Accounts Payable, reducing their liability, and credit Cash, signifying the payment made. This symmetrical flow ensures both companies accurately track their financial positions. Quick Comparison: AP vs AR
Category
Accounts Payable (AP)
Accounts Receivable (AR)
Definition
Money the company owes to vendors for purchases made on credit
Money the company expects to receive from customers for credit sales
Balance Sheet Classification
Current Liability
Current Asset
Cash Flow Impact
Cash Outflow (future payments)
Cash Inflow (future receipts)
Parties Involved
Company (buyer) and its suppliers
Company (seller) and its customers
Business Perspective
Represents obligations (money owed)
Represents claims (money owed to business)
Payment Terms
Example: Net-30, Net-60 (defined by suppliers)
Example: Net-30, Net-45 (offered to customers)
Management Goal
Optimize payments, maintain vendor relationships
Speed up collections, reduce bad debts
Common Metrics
Days Payable Outstanding (DPO), Aging Payables
Days Sales Outstanding (DSO), Aging Receivables
Understanding the Bigger Picture AP and AR provide valuable insights into a company's financial well-being:
Company A's Perspective: High AR indicates strong sales, but also potential delays in customer payments. Effective collections management becomes crucial.Company B's Perspective: High AP might suggest taking advantage of supplier discounts or negotiating better payment terms to improve cash flow.1. The Importance of Balance: While AP and AR seem like opposing forces, they need to be managed in balance. Here's why:
Excessive Receivables: A bloated AR can signal slow collections and impact cash flow. Tightening credit policies or implementing stricter collections processes might be necessary.High Payables: While leveraging supplier credit can be beneficial, excessively high AP can strain vendor relationships and lead to late payment penalties. Negotiating extended credit terms or prioritizing payments becomes important.2. Technology: A Helping Hand Financial management software can streamline both AP and AR processes. It can:
Automate invoice processing to reduce manual tasks and errors. Facilitate timely payments to avoid penalties and leverage early payment discounts. Provide real-time insights into both AP and AR to improve cash flow management. Key Metrics to Track 1. Days Payable Outstanding (DPO) Formula : (Average AP ÷ COGS) × Number of Days
DPO measures the average number of days it takes a company to pay its suppliers. A higher DPO may indicate effective use of supplier credit, but an excessively high value can also signal strained vendor relationships.
2. Days Sales Outstanding (DSO) Formula : (Average AR ÷ Total Credit Sales) × Number of Days
DSO reflects how quickly a company collects cash from customers after a sale. Lower DSO values indicate strong collection efficiency, while higher values may suggest delayed payments or credit policy issues.
3. Cash Conversion Cycle (CCC) Formula : DSO + DIO − DPO
The CCC shows the total time it takes for a company to convert its investments in inventory and resources into cash. A shorter cycle means faster liquidity and more efficient cash flow management.
Tips for Managing Accounts Payable and Accounts Receivable Effective Accounts Receivable (AR) and Accounts Payable (AP) management is a cornerstone of healthy business finances. Here are some actionable tips to streamline your AR and AP processes and ensure optimal cash flow:
Best Practices for Managing Accounts Payable Effective AP management helps maintain strong vendor relationships, optimize cash flow, and protect the company against financial risk. Here are the best practices:
Early Payment Discounts: Take advantage of supplier discounts to reduce costs and build goodwill.Payment Scheduling: Optimize your payment timeline to preserve cash while staying within agreed vendor terms.Vendor Relationships: Maintain strong communication and transparency with suppliers to support long-term partnerships.Negotiate Better Payment Terms: Work with suppliers to extend credit periods, secure flexible terms, or reduce penalties.Implement Approval Hierarchies: Use multi-level invoice approval workflows to prevent errors and reduce fraud risk.Monitor Aging Reports Weekly: Regularly review AP aging schedules to stay ahead of overdue payables and avoid penalties.Maintain Accurate and Up-to-Date Records: Keep detailed, organized records of all invoices, purchase orders, payments, and adjustments.Best Practices for Managing Accounts Receivable Strong AR practices ensure timely collections, reduce bad debts, and strengthen cash flow predictability.
Define Clear Customer Payment Terms: Create well-structured credit policies tailored to customer risk profiles and industry norms.Transparent Communication: Ensure payment terms are clearly presented on invoices, contracts, and quotations.Timely Invoicing: Issue invoices immediately after delivery or service completion to prevent cash flow delays.Structured Collections Process: Use a defined follow-up schedule, including emails, calls, and escalation steps, for overdue accounts.Send Automated Payment Reminders: Use software to schedule reminders before and after due dates.Segment Customers: Prioritize follow-ups for high-risk or habitually late-paying customers.Offer Multiple Payment Options: Provide UPI, NEFT, RTGS, credit/debit cards, and payment links to reduce friction.Consider Factoring: For large receivables, explore invoice factoring to accelerate cash inflows.Maintain Accurate and Timely Records: Update AR entries, apply payments correctly, and ensure proper reconciliation.Additional Considerations: Technology Integration: Consider utilizing accounting software or dedicated AR/AP automation tools to streamline data entry, expedite workflows, and gain real-time insights into your financial health.Automation: Automate repetitive tasks like invoice generation and payment processing whenever possible to improve efficiency and minimize human error.Regular Reporting and Analysis: Generate reports on AR aging and AP turnover to identify trends and implement corrective actions as needed.Employee Training : Train your staff on your AR and AP processes, including credit control procedures, collections strategies, and proper record-keeping practices.The Role of Automation in AP and AR Management Automation is reshaping how businesses handle both AP and AR. Modern tools reduce manual work, improve accuracy, and offer real-time financial visibility, allowing teams to shift their focus from routine processing to strategic financial decision-making. While most automation platforms emphasize either AP or AR, the efficiencies gained in both areas collectively strengthen cash flow, compliance, and overall financial operations.
With that context, here’s how automation enhances each function:
How Automation Transforms Accounts Payable Automation tools take over repetitive AP tasks, including invoice capture, validation, approvals, and payments. For Indian startups, this shift is particularly valuable because it improves accuracy, saves time, and supports better financial planning.
Some of the key benefits include:
AP Workflow Automation : Automating manual AP processing with accounts payable automation solutions frees up your finance team to focus on strategic initiatives like AOP planning , capital budgeting, etc., thus enhancing productivity and strategic focus.Reduced Errors : Eliminating manual data entry minimizes human errors and improves financial accuracy, making audits easier.Improved Cash Flow Management through Increased Visibility: The right AP tool, powered by accounts payable automation solutions, provides real-time visibility into your payables data, optimising cash flow and enabling you to manage your working capital funding gap effectively.Simplified Compliance: AP tools ensure adherence to GST/TAX/IRN/TDS/MSME /Cybersecurity and moreAutomated Fraud Detection: AP automation tools, integral to accounts payable automation solutions, help in the detection of fraud through invoice processing checks like Deduplication, BAV (Bank Account Verification), etc., ensuring the financial integrity of your startup.Automation Benefits for Accounts Receivable AR tools help companies speed up collections, reduce outstanding receivables, and maintain predictable cash flow. On the other hand, automation can generate and send invoices instantly after order completion, reducing billing delays. These tools also trigger automated payment reminders, helping businesses follow up consistently without manual effort. This leads to faster collections and a reduced Days Sales Outstanding (DSO).
Additionally, features like customer self-service payment portals make it easier for clients to view invoices, download statements, and make payments digitally. Real-time AR aging visibility further helps finance teams identify high-risk accounts and make proactive decisions.
Key Features to Look For in AP Automation Tools When evaluating AP automation solutions, look for features that meaningfully improve accuracy, control, and transparency:
OCR for invoice capture Multi-level approval workflows GST/TDS/RCM compliance automation Payment scheduling and bulk payments processing Fraud detection and duplicate invoice checks Real-time dashboards and reporting ERP integrations (Tally, Zoho Books, QuickBooks, etc.) Vendor management and communication tools Transform Your AP Operations with Mysa Managing accounts payable alongside accounts receivable can be complex, especially for growing startups. Manual AP processes, delayed vendor payments, and compliance risks can disrupt cash flow and create unnecessary operational stress.
Mysa is designed to tackle these challenges head-on for Indian businesses, automating routine AP tasks while maintaining accuracy and compliance. With Mysa, startups can transform their AP operations and focus on strategic growth rather than manual accounting chores. Here’s how:
Seamless Invoice Processing: Automatically capture, validate, and approve invoices with critical details like vendor bank details, GSTINs, and TDS calculations, reducing errors and saving valuable time.Optimized Cash Flow: Plan payments efficiently, with payment priorities, due date filters, and daily reminders of pending tasks.Regulatory Compliance Made Simple: Stay compliant with GST, TDS, RCM, and MSME regulations without manual tracking.Enhanced Vendor Management: Track payments, maintain strong supplier relationships,with notifications for vendors as and when payments are processed fully or partially.Ready to transform your AP workflow? Book a demo with Mysa today and see how automation can empower your business!
Frequently Asked Questions About Accounts Payable and Receivable What is the main difference between accounts payable and accounts receivable? Accounts payable (AP) represents money a company owes to its vendors or suppliers for goods and services received. In contrast, accounts receivable (AR) represent amounts customers owe the company for goods or services sold on credit. AP is a liability, while AR is an asset on the balance sheet.
How do accounts payable and receivable affect cash flow? Accounts payable influences your cash outflows, and delaying payments can help you hold on to cash for a short time, though it may strain vendor relationships. Accounts receivable influences your cash inflows, and slow collections can lead to liquidity problems. Strong management of both keeps your cash flow steady and supports overall operational stability.
What is Days Payable Outstanding (DPO) and why does it matter? DPO measures the average time a company takes to pay its suppliers. A higher DPO can help optimize cash flow by retaining cash longer, but excessively high DPO may strain vendor relationships. Monitoring DPO helps businesses balance liquidity with supplier trust.
What is Days Sales Outstanding (DSO), and how can it be improved? DSO indicates the average number of days it takes a company to collect payments from customers. Lowering DSO improves cash flow and reduces the risk of bad debts. Strategies to strengthen DSO include timely invoicing, automated reminders, credit checks, and offering multiple payment options.
Can a transaction be both AP and AR? Yes. In intercompany transactions or reciprocal business arrangements, a single transaction may result in an accounts payable entry for one entity and an accounts receivable entry for the other. This reflects the dual nature of credit-based transactions.
How does automation help manage AP and AR together? Automation streamlines repetitive tasks across AP and AR, including invoice generation, data entry, approvals, and payment reminders. It improves accuracy, reduces errors, provides real-time visibility, and accelerates collections and payments, enhancing overall cash flow management.
What are common mistakes in managing accounts payable? Common AP mistakes include late payments, missing discounts, duplicate payments, inadequate approval workflows, and poor record-keeping. These errors can lead to cash flow issues, penalties, and strained vendor relationships.
What are common mistakes in managing accounts receivable? Common AR mistakes include delayed invoicing, poor credit evaluation, failure to follow up on overdue accounts, manual tracking errors, and a lack of follow-up. Such mismanagement can increase DSO, reduce liquidity, and heighten the risk of bad debts.
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