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What is accounts payable and receivable process

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedAug 20202 min read

In the business world, sometimes you need to purchase goods based on credit, while you may also occasionally be required to sell goods on credit. That’s where accounts payable and accounts receivable processes and procedures come into play. Find out more about these key business functions and learn how they work in real terms.

What’s the difference between accounts payable and accounts receivable?

Accounts receivable (AR) refers to the amount of money that’s owed to a company for goods or services but hasn’t yet been paid. They’re listed on the balance sheet as an asset and are created when companies allow buyers to make a purchase on credit. Accounts payable (AP) is essentially the opposite of accounts receivable – it’s the amount of money that a company owes to other businesses. While accounts receivable are listed as assets, accounts payable are classified as current liabilities.

Accounts payable and accounts receivable play a big role in your company’s cash flow. For many businesses, late payments have become the norm. In fact, small-to-medium businesses (SMBs) in the UK are routinely paid 18 days late for goods or services, while 1 in 6 of their invoices remain unpaid after a period of 90 days. Having so much cash languishing on your balance sheets can prove challenging, as it leaves businesses without enough capital to invest in growth or reduce debt. As a result, an effective accounts receivable business process flow can have a seriously beneficial effect on the financial health of your company.

By the same token, it’s incredibly important to properly manage your accounts payable process. Without a full understanding of who and what your business owes, there’s no real way to determine the financial health of your business with any degree of accuracy. Missing payments can lead to late payment interest or damaged relationships with customers, while too many current liabilities on your balance sheet could result in significant cash flow problems. Overall, optimising your accounts payable and accounts receivable processes and procedures is a great way to improve your company’s cash flow and financial health.

How does accounts receivable payment processing work?

The accounts receivable business process flow is relatively straightforward. There are three main steps that the accounts receivable team will go through when chasing a payment:

Send the invoice – After work has been completed, an invoice will be sent to the customer immediately.
Track the invoice – Invoices will be tracked on a regular basis, and if payment hasn’t arrived, reminders will be sent to customers.
Receive payment – When payment has been received, the accounts receivable team will mark it as ‘paid’ and enter it into the accounts receivable ledger.

How does accounts payable work?

As with accounts receivable payments processing, there are three key steps associated with the accounts payable process, although it’s important to remember that for many larger businesses, a significant amount of time may elapse between these steps:

Receive the invoice – After you’ve purchased goods or services from another business, you’ll receive an invoice requesting payment.
Record the invoice – The next step will be to record the invoice in the accounts payable ledger.
Send payment – Finally, payment will be made, and the entry should be removed from the account.

What about accounts receivable process automation?

Although many companies still handle accounts receivable via email, accounts receivable process automation can be a great way to encourage customers to pay more quickly. There are a broad range of electronic billing systems, including Xero and QuickBooks, that can be used in tandem with a cloud-based payments system like GoCardless to help automate your accounts receivable business process flow.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.