Money moves through a small business from several directions each week. Customers pay invoices. Suppliers send bills. Staff wages, rent, software and tax payments all need to be covered on time.
Two terms sit at the centre of this movement: accounts receivable and accounts payable. Accounts receivable is money customers owe your business. Accounts payable is money your business owes to others. Knowing the difference helps you keep accurate records, manage cash flow, and avoid gaps between what you are owed and what you owe.
What Is Accounts Receivable?
Accounts receivable, or AR, is money customers owe you for goods or services you have already delivered. Say you run a small graphic design business and complete a $2,000 project for a client with 14-day payment terms. Until that invoice is paid, the $2,000 sits in your accounts receivable. You have earned it, but it is not in your bank account yet.
This matters because a business can look busy on paper while running low on cash. Sales figures show what you have earned, not what you have collected. If customers pay slowly, the gap between recorded income and available cash can grow larger than expected.
A simple example:
- You invoice a customer $3,000 with 14-day terms.
- The invoice is unpaid, so it counts as accounts receivable.
- Once payment lands, the receivable clears.
What Is Accounts Payable?
Accounts payable, or AP, is money your business owes to suppliers and other businesses. If a supplier bills you $600 for materials with 30-day terms, that $600 is an account payable until you pay it. It is the reverse side of accounts receivable: your customers owe you, and you owe your suppliers.
Keeping accounts payable organised means tracking due dates alongside amounts owed. A pile of unpaid bills can build up quietly if nothing is tracking when each one is due, and that can lead to late fees or strained supplier relationships.
Example bills for one month:
- $800 for stock
- $300 for software
- $1,200 for equipment servicing
- $500 for professional services
Unpaid, these all sit in accounts payable until settled.
Accounts Receivable vs Accounts Payable
The simplest way to tell them apart is direction: one is money coming in, the other is money going out.
| Accounts Receivable | Accounts Payable |
|---|---|
| Money customers owe you | Money you owe suppliers |
| Tied to sales and invoices | Tied to purchases and bills |
| Cash you expect to receive | Cash you expect to pay |
| Needs regular collection | Needs regular payment |
| Overdue AR can strain cash flow | Poor AP tracking risks late fees |
Both sides need attention. Strong sales do not help much if customers pay late, and paying every bill the moment it arrives can leave a business short on cash for other costs. The healthiest approach keeps both organised and reviewed regularly.
Why Both Matter for Cash Flow
Accounts receivable can look healthy while still causing cash problems. A business might have $15,000 in unpaid invoices, $8,000 in supplier bills due soon, $4,000 in wages, and $2,000 in rent and other costs. The business may be profitable on paper, yet if customers delay payment, covering those bills still gets difficult.
Accounts payable works the same way in reverse. $10,000 in the bank might look solid, but after $2,000 in supplier payments, payroll commitments of $2,500, $1,500 in rent and $1,000 in other expenses, only $3,000 is left. A large tax bill landing around the same time makes that gap feel tighter. This is why the bank balance alone does not tell the full story. Knowing what is coming due, and what is expected to arrive, matters just as much.
The Timing Gap Between Receivables and Payables
Customers might take 30 days to pay, while suppliers expect payment in 14. A $5,000 customer invoice due in 30 days and a $3,000 supplier bill due in 14 days means the business has to cover that supplier payment before the customer payment arrives. Spotting this kind of gap early makes it easier to plan around it.
A weekly cash flow check is usually enough to catch these gaps before they cause problems. Reviewing what is owed to you and what you owe, side by side, gives a clearer short-term picture than looking at sales figures or your bank balance on their own.
Managing Accounts Receivable
An invoice only works if it answers every question a customer might have before paying. Include the customer’s name, invoice number, date, a description of the work, the total amount, GST where it applies, payment terms, due date and payment details, and send it the moment the job wraps up. Waiting a few days to invoice does not just delay payment, it quietly resets the clock on when that money actually lands in your account.
Payment terms work best when they are fixed and visible, whether that is 7, 14 or 30 days depending on the arrangement. Reach out before an invoice is due rather than scrambling once it is overdue, and note down every reminder you send. Running an aged receivables report now and then, sorted into current, 1 to 30 days, 31 to 60, 61 to 90 and 90-plus days overdue, points straight to the customers who need a phone call instead of another email.
Managing Accounts Payable
Bills tend to arrive from everywhere at once: email, post, a supplier’s portal, sometimes a text message. Pulling them all into a single record, with supplier name, invoice number, amount, invoice date, due date and payment status, stops any of them from slipping through the cracks. Before releasing payment, confirm the goods or service actually arrived, the amount lines up, the invoice is not a repeat of one already paid, and GST has been recorded correctly.
Spreading payment dates out, where supplier terms give you room to, keeps several large bills from landing in the same week and draining your account at once. Accuracy and timing matter far more here than speed. Platforms like Xero bookkeeping can take some of this off your plate by flagging bills as their due dates approach.
Common Mistakes to Avoid
Most of these mistakes come down to timing and record-keeping rather than anything complicated.
Accounts receivable mistakes:
- Sending invoices late: Delaying invoices pushes back the payment clock and slows down cash coming in.
- Letting overdue invoices go unchecked: Invoices get forgotten when nobody reviews what is still outstanding regularly.
- Using unclear payment terms: Customers do not know when to pay if the due date is not obvious.
- Skipping follow-ups: Many businesses feel awkward chasing payment, but reminders are a normal part of business.
- Falling behind on records: Without updated records, you lose track of exactly how much customers actually owe.
Accounts payable mistakes:
- Paying the same invoice twice: Duplicate invoices often slip through when bills arrive through several different channels.
- Missing due dates: Late payments can lead to fees and strain your relationship with suppliers over time.
- Paying without checking accuracy: Always confirm the invoice is genuine and correct before releasing any payment.
- Forgetting to record bills that arrive by email: Unlogged bills leave your accounts payable balance looking lower than it actually is.
- Ignoring small recurring costs that add up over time: Small charges left untracked can quietly erode your available cash each month.
A simple weekly check on both invoices and bills catches most of these problems before they grow.
GST, BAS and Your Accounting Method
Accounts receivable and payable also connect to GST reporting. Under the cash basis, GST is generally reported when payment is received or made. Under the accruals basis, it is generally reported based on when the sale or purchase happens, regardless of when the cash moves. Getting this wrong can throw off your BAS lodgement each quarter.
Accounting software such as Xero, MYOB and QuickBooks can record invoices, bills and payments, but the reports are only as accurate as what is entered. If you are unsure which GST method applies to your business, it is worth checking with a qualified tax professional or bookkeeper before your next BAS is due.
Keep Both Sides in Balance
Accounts receivable and accounts payable are two of the most basic parts of running a small business, and both shape your day-to-day cash position. Receivables show what customers owe you. Payables show what you owe others. Checking both regularly, rather than relying on your bank balance alone, gives a far more accurate read on where your business actually stands.
None of this requires a complicated system. Send invoices on time, follow up on what is overdue, record supplier bills as they arrive, and review your cash position weekly. For Australian small businesses, advancr provides fixed-fee bookkeeping with ongoing reconciliation and accountant-ready records across Xero, MYOB and QuickBooks, so your receivables and payables stay accurate without extra admin on your end.
If your receivables and payables need a proper system behind them, get in touch with advancr for a free quote, or get started with a fixed-fee package built for your business.