Accounts Receivable (AR) is the amount of money that a business expects to receive from its customers for goods or services sold on credit.
In simple words:
Accounts Receivable = Money to be received from customers
A business sells goods worth ₹50,000 to Rahul on credit.
Rahul has not paid yet.
Therefore:
Accounts Receivable = ₹50,000
Rahul is called a Debtor/Customer.
Accounts Payable (AP) is the amount of money that a business owes to its suppliers or vendors for goods or services purchased on credit.
In simple words:
Accounts Payable = Money to be paid to suppliers
A business purchases goods worth ₹30,000 from ABC Traders on credit.
Payment has not been made yet.
Therefore:
Accounts Payable = ₹30,000
ABC Traders is called a Creditor/Supplier.
| Accounts Receivable | Accounts Payable |
|---|---|
| Money to be received | Money to be paid |
| Arises mainly from credit sales | Arises mainly from credit purchases |
| Customer is the debtor | Supplier is the creditor |
| Usually an asset | Usually a liability |
| Increases when credit sales are made | Increases when credit purchases are made |
| Decreases when customers pay | Decreases when suppliers are paid |
Receivable → Receive Money
Payable → Pay Money
A Debtor is a customer who owes money to the business.
ABC Ltd. sells goods worth ₹1,00,000 to XYZ Ltd. on credit.
XYZ Ltd. has to pay ABC Ltd.
Therefore:
XYZ Ltd. = Debtor
₹1,00,000 = Accounts Receivable
A Creditor is a person or business to whom the company owes money.
ABC Ltd. purchases goods worth ₹70,000 from PQR Traders on credit.
ABC Ltd. has to pay PQR Traders.
Therefore:
PQR Traders = Creditor
₹70,000 = Accounts Payable
Credit Sales occur when goods or services are sold but the customer is allowed to make payment later.
Goods sold to Rahul:
₹40,000
Payment will be received after 30 days.
Rahul A/c Dr. ₹40,000
To Sales A/c ₹40,000
This creates an Accounts Receivable balance.
Credit Purchase occurs when goods or services are purchased but payment is made later.
Goods purchased from ABC Traders:
₹60,000
Payment will be made after 30 days.
Purchases A/c Dr. ₹60,000
To ABC Traders A/c ₹60,000
This creates an Accounts Payable balance.
An Invoice is a document issued by a seller to a customer showing details of a sale or service.
An invoice may contain:
Invoices are important for tracking receivables and payables.
The Due Date is the date by which the customer is expected to make payment according to the agreed payment terms.
Invoice Date = 1 August
Credit Period = 30 days
Due Date = approximately 31 August, subject to the agreed terms and applicable date-counting conventions.
If payment is not received by the due date, the invoice may become overdue.
The Credit Period is the time allowed to a customer to pay for a credit transaction.
A business gives customers 30 days credit.
If goods are sold on 1 August, payment is generally expected around the agreed due date.
Common credit periods include:
The actual period depends on the business agreement.
Outstanding Receivable is the amount that customers still owe to the business.
Total Credit Sales = ₹2,00,000
Amount Received = ₹1,50,000
Outstanding:
₹2,00,000 − ₹1,50,000 = ₹50,000
Therefore:
Outstanding Receivable = ₹50,000
Outstanding Payable is the amount that the business still owes to suppliers.
Total Credit Purchases = ₹1,50,000
Amount Paid = ₹1,00,000
Outstanding:
₹1,50,000 − ₹1,00,000 = ₹50,000
Therefore:
Outstanding Payable = ₹50,000
An Ageing Report classifies outstanding invoices according to how long they have remained unpaid.
For example:
| Age | Amount |
|---|---|
| 0–30 Days | ₹40,000 |
| 31–60 Days | ₹25,000 |
| 61–90 Days | ₹15,000 |
| Above 90 Days | ₹10,000 |
Ageing reports help businesses identify overdue amounts and prioritize collection efforts.
Receivable ageing helps businesses:
A high level of overdue receivables can create cash-flow pressure.
Payable ageing helps businesses:
Accounts Receivable and Accounts Payable have a direct impact on business cash flow.
A business makes sales of ₹5,00,000 on credit.
Accounting profit may increase, but if customers do not pay immediately, the business has not yet received ₹5,00,000 in cash.
Similarly, if the business purchases goods on credit, it may receive inventory before actually paying the supplier.
Therefore:
Receivables affect cash inflow.
Payables affect cash outflow.
Collection Management means systematically following up with customers to receive outstanding payments.
It may involve:
Payment Management means planning and recording payments made to suppliers and other creditors.
It involves:
When a customer pays an outstanding amount, the business records a Receipt.
Customer owes:
₹25,000
Customer pays:
₹25,000
Cash/Bank A/c Dr. ₹25,000
To Customer A/c ₹25,000
The customer’s outstanding balance becomes zero, assuming there are no other dues.
When a business pays an outstanding supplier balance, it records a Payment.
Supplier balance:
₹40,000
Business pays:
₹40,000
Supplier A/c Dr. ₹40,000
To Cash/Bank A/c ₹40,000
The supplier’s outstanding balance becomes zero, assuming there are no other transactions.
A Credit Note may be issued when the amount receivable from a customer needs to be reduced due to an eligible adjustment.
Customer returns goods worth:
₹5,000
The customer’s outstanding balance may be reduced by the appropriate amount.
Credit notes can also involve GST adjustments where applicable.
A Debit Note may be used for certain purchase-related adjustments, such as eligible purchase returns or other adjustments.
Goods worth ₹3,000 are returned to a supplier.
The amount payable to the supplier may be reduced according to the transaction.
Bad Debt is an amount due from a customer that is determined to be irrecoverable, subject to the applicable accounting and tax rules.
Customer balance = ₹20,000
After appropriate recovery efforts and assessment, the amount is determined to be irrecoverable.
It may then be treated as bad debt according to the applicable accounting treatment.
A Provision for Doubtful Debts is an accounting estimate made for receivables that may not be fully recoverable.
Total Receivables = ₹1,00,000
Estimated doubtful amount = ₹5,000
The business may recognize an appropriate allowance/provision according to its accounting policy and applicable accounting standards.
| Bad Debt | Doubtful Debt |
|---|---|
| Amount considered irrecoverable | Amount that may become irrecoverable |
| Loss is identified | Potential loss is estimated |
| Specific receivable is generally identified | Often based on an estimate |
| Written off/treated according to applicable accounting rules | Allowance/provision may be created |
Tally Prime can help businesses manage customer receivables by maintaining:
A typical workflow is:
Customer Creation → Sales Invoice → Outstanding Receivable → Receipt Entry → Outstanding Reduced
Tally Prime can help businesses manage supplier payables through:
A typical workflow is:
Supplier Creation → Purchase Invoice → Outstanding Payable → Payment Entry → Outstanding Reduced
ABC Traders sells goods worth ₹1,00,000 to XYZ Ltd. on 30-day credit.
XYZ Ltd. A/c Dr. ₹1,00,000
To Sales A/c ₹1,00,000
XYZ Ltd. now owes ABC Traders ₹1,00,000.
After 30 days, XYZ Ltd. pays ₹60,000.
Bank A/c Dr. ₹60,000
To XYZ Ltd. A/c ₹60,000
Remaining receivable:
₹1,00,000 − ₹60,000 = ₹40,000
Therefore:
Outstanding Receivable = ₹40,000
ABC Traders purchases goods worth ₹80,000 from PQR Ltd. on credit.
Purchases A/c Dr. ₹80,000
To PQR Ltd. A/c ₹80,000
ABC Traders owes PQR Ltd. ₹80,000.
ABC Traders later pays ₹50,000.
PQR Ltd. A/c Dr. ₹50,000
To Bank A/c ₹50,000
Remaining payable:
₹80,000 − ₹50,000 = ₹30,000
Therefore:
Outstanding Payable = ₹30,000
A business can improve receivable management by:
A business can improve payable management by:
Students should avoid:
Always select the correct ledger.
Check the invoice before recording it.
Enter the agreed payment terms correctly.
Avoid entering the same invoice twice.
Record collections and supplier payments promptly.
Regularly review ageing reports.
Compare customer and supplier records with supporting documents/statements where appropriate.
AR and AP are essential areas of practical accounting.
Students who understand them can manage:
Remember:
Credit Sale → Customer Invoice → Accounts Receivable → Due Date → Collection → Receipt Entry → Outstanding Reduced
Credit Purchase → Supplier Invoice → Accounts Payable → Due Date → Supplier Payment → Payment Entry → Outstanding Reduced
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