Accounts receivable and accounts payable basics

How do they compare?

The same business can have both at once.

How are they recorded?

In accounting software, creating an invoice records sales and a receivable; recording the customer's payment clears it against the bank deposit. Entering a supplier bill records the expense or inventory and a payable; paying it clears it. Matching each deposit to its invoice, and each payment to its bill, keeps both balances accurate.

What is an aging report?

A report that sorts unpaid balances by how long they have been outstanding: current, 1 to 30 days overdue, 31 to 60, 61 to 90 and over 90. A rising share in the older columns signals collection problems for receivables, or cash strain for payables. Review both monthly. See the month-end close checklist.

What does an aging report look like?

Of $11,700 owed, $4,200 is more than 30 days overdue, mostly from Client C, which needs follow-up before more work is done.

How are customer deposits handled?

Money received before the work is done or goods are delivered is a customer deposit, recorded as a liability until earned. For tax, cash-method businesses generally count advance payments as income when received, while accrual-method businesses may defer some advance payments under specific rules. Keep deposits separate from receivables so the aging report stays accurate.

How do they interact with tax?

Most small businesses report tax on the cash method: income counts when customers pay and expenses when you pay. Receivables and payables do not affect taxable income until settled. Under the accrual method, income counts when invoiced and expenses when incurred, whether or not cash has moved. The books can track receivables and payables either way. See cash vs accrual accounting.

Can you deduct an unpaid invoice?

Only if the income was already included in taxable income, which is normally the case only under the accrual method. A cash-method business never reported the unpaid invoice as income, so there is nothing to deduct. Write it off in the books once it is clearly uncollectible, and keep evidence of collection efforts.

How do you manage receivables?

1. Invoice promptly

   With clear terms, due dates and payment details.

2. Offer easy payment

   Online links, ACH and cards.

3. Send reminders

   Before and after the due date.

4. Review the aging report

   And escalate overdue accounts.

5. Consider deposits

   For large or new customers.

How do you manage payables?

Enter bills as they arrive, pay on the due date rather than early unless there is a discount, take early-payment discounts when they are worth more than holding the cash, and keep supplier statements to reconcile balances. Late payments can cost fees, discounts and supplier goodwill.

Set up bills for recurring costs, such as software and rent, so they appear in payables automatically each month and are not missed. Before paying, check each bill against the order or contract to avoid paying for something not received, and watch for duplicate bills from the same supplier.

Which numbers help?

Days sales outstanding, receivables divided by average daily sales, shows how long customers take to pay. Days payables outstanding does the same for bills. If customers take 50 days to pay and suppliers expect payment in 30, the business needs cash to cover the gap. See the cash flow statement explained.

This guide is general information. It is not tax or legal advice for your situation.