Accounts Payable (AP) and Accounts Receivable (AR) are the foundation of financial accounting, working capital management, and cash flow control. Any business that buys or sells on credit must manage these accounts efficiently to maintain liquidity and profitability.
This guide explains Accounts Payable workflow and Accounts Receivable workflow separately in the simplest way, with practical examples, journal entries, and strategic insight.
What is Accounts Payable (AP)?
Accounts Payable represents money a company owes to suppliers for goods or services purchased on credit. It is recorded as a current liability on the balance sheet.
In simple words:
If you buy now and pay later, that amount is Accounts Payable.
Example of Accounts Payable
Suppose a company purchases inventory worth $10,000 on 30-day credit from a supplier.
Journal Entry at Purchase:
Inventory Dr 10,000
Accounts Payable Cr 10,000
When payment is made after 30 days:
Accounts Payable Dr 10,000
Cash Cr 10,000
AP first increases liabilities, then reduces cash when paid.
Accounts Payable Workflow (Step-by-Step Process)
A strong AP workflow ensures internal control, fraud prevention, cost accuracy, and proper vendor management.
1. Purchase Order (PO) Creation
The purchasing department creates a Purchase Order and sends it to the supplier. It defines quantity, price, and payment terms.
2. Goods Receipt
The company receives goods and prepares a Goods Received Note (GRN).
3. Invoice Receipt
The supplier sends an invoice requesting payment.
4. Three-Way Matching
The accounts department matches:
• Purchase Order
• Goods Received Note
• Supplier Invoice
This prevents overpayment and errors.
5. Recording the Liability
If everything matches, the invoice is recorded in Accounts Payable.
6. Payment Processing
On the due date, payment is made and AP is reduced.
Why Accounts Payable Is Important
• Improves supplier relationships
• Protects cash flow
• Helps optimize working capital
• Enables early payment discounts
• Impacts the Cash Conversion Cycle
Efficient AP management means controlling when cash leaves the business.
What is Accounts Receivable (AR)?
Accounts Receivable represents money customers owe to the company for goods or services sold on credit. It is recorded as a current asset on the balance sheet.
In simple words:
If you sell now and get paid later, that amount is Accounts Receivable.
Example of Accounts Receivable
Suppose a company sells goods worth $15,000 on 30-day credit.
Journal Entry at Sale:
Accounts Receivable Dr 15,000
Sales Revenue Cr 15,000
When cash is received:
Cash Dr 15,000
Accounts Receivable Cr 15,000
AR increases assets first, then converts into cash later.
Accounts Receivable Workflow (Step-by-Step Process)
A strong AR workflow ensures proper credit control, revenue recognition, and timely cash collection.
1. Credit Approval
Before selling on credit, the company checks customer creditworthiness.
2. Sales Order Processing
The sales team confirms order and delivery terms.
3. Delivery of Goods or Services
Goods are delivered or service is completed.
4. Invoice Generation
An invoice is sent to the customer with payment terms such as Net 30.
5. Recording the Receivable
The receivable is recorded in the accounting system.
6. Collection and Follow-Up
Payment reminders are sent. Cash is collected.
7. Reconciliation
Payments are matched with invoices. Differences are investigated.
8. Bad Debt Management
If a customer fails to pay, an allowance for doubtful accounts may be recorded.
Example of Bad Debt Entry:
Bad Debt Expense Dr
Allowance for Doubtful Accounts Cr
Why Accounts Receivable Is Important
• Improves cash inflow
• Reduces bad debt risk
• Strengthens liquidity
• Impacts profitability
• Shortens the Cash Conversion Cycle
Efficient AR management means accelerating when cash enters the business.
Key Differences Between Accounts Payable and Accounts Receivable
Accounts Payable
• Liability
• Money we owe
• Cash outflow
• Supplier focused
• Managed to delay payments strategically
Accounts Receivable
• Asset
• Money owed to us
• Cash inflow
• Customer focused
• Managed to speed up collections
Strategic Insight: Working Capital Perspective
Working Capital = Current Assets − Current Liabilities
AR increases working capital.
AP increases current liabilities and affects working capital.
A company with strong AR collection and optimized AP payments maintains healthy liquidity without relying heavily on external financing.
Final Takeaway
Accounts Payable controls cash leaving the business.
Accounts Receivable controls cash entering the business.
Together, they determine:
• Liquidity
• Operational efficiency
• Cash flow management
• Financial stability
• Long-term sustainability
Understanding both processes deeply helps businesses manage the cash conversion cycle effectively and build a financially stable organization.