Money in and money out
Invoices become receivables and bills become payables. Each is a list that ties to the books, and the cash settles them later.
Most of a company's money moves in two loops. Customers are invoiced and pay later, and vendors bill the company and are paid later. In between, the money is owed, and the books keep a list of who owes what. That's accounts receivable on one side and accounts payable on the other.
Money in
On September 15 Northwind delivered goods to a trade customer and sent an invoice for $22,000, due in 30 days. That's revenue in September, because the goods were delivered, and a receivable until the customer pays. On the 22nd the customer paid $14,000. That turns part of the receivable into cash and leaves $8,000 still owed.
A trade customer is invoiced $22,000, payable in 30 days.
| Account | Debit | Credit |
|---|---|---|
| 1200Accounts receivable | 22,000.00 | |
| 4000Revenue | 22,000.00 | |
| Balanced | 22,000.00 | 22,000.00 |
The goods are delivered, so the revenue is earned — in September, not in October when the money turns up. What is owed sits in accounts receivable. No sales tax: the trade customer buys to resell, and has given Northwind a resale certificate saying so.
The trade customer pays $14,000 of the September invoice.
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 14,000.00 | |
| 1200Accounts receivable | 14,000.00 | |
| Balanced | 14,000.00 | 14,000.00 |
No revenue here either — that was recorded on the 15th. A receivable turns into cash, and the income statement never hears about it.
JE-7 and JE-10: invoiced, then partly collected.
Money out
On September 3 a supplier delivered $18,000 of stock with a bill on 30-day terms. Northwind owns the goods and owes the money, so it's inventory and a payable, and no cash has moved yet. On the 20th Northwind paid $12,000, leaving $6,000 to pay.
$18,000 of stock arrives from a supplier, on 30-day terms.
| Account | Debit | Credit |
|---|---|---|
| 1300Inventory | 18,000.00 | |
| 2000Accounts payable | 18,000.00 | |
| Balanced | 18,000.00 | 18,000.00 |
No cash moved at all, and the entry still has to be made: Northwind now owns goods and owes money for them. This is the entry cash-basis bookkeeping cannot make.
Northwind pays $12,000 against the supplier's bill.
| Account | Debit | Credit |
|---|---|---|
| 2000Accounts payable | 12,000.00 | |
| 1000Cash — operating | 12,000.00 | |
| Balanced | 12,000.00 | 12,000.00 |
Nothing was bought here and nothing was consumed. An obligation was settled: the liability goes down and so does cash. No expense appears, because the expense happened when the goods were sold.
JE-4 and JE-9: billed, then partly paid.
Each step on the way out is a control: a W-9 before the first payment, a bill matched to what was ordered and received, an approval, and a payment released by someone other than the approver. What accounts payable is walks the whole loop.
Each list is a subledger, and its total must agree with its account in the general ledger at every close. A receivable nobody chases goes stale, and a bill paid twice or never is how vendors and cash go wrong.
Wrong
Whoever sees a bill in the inbox pays it from the bank app.
Right
Bills go into AP, are matched to what was ordered and received, approved by a founder, and paid in a weekly run by the other founder.
A bill is paid because someone approved it, against an order and a delivery, from a vendor whose W-9 is on file. An email is not an approval.
An invoice creates revenue and a receivable. A bill creates a cost and a payable. The cash moving later settles each one and touches no revenue or expense.
Where this goes next: on the way in, order to cash, how to write an invoice, collections and the AR aging report. On the way out, approvals and three-way match, payment runs and AP aging. Both use these same September entries.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- US GAAP
- ASC 310 (opens in a new tab)ReceivablesFree after registration
- ASC 405 (opens in a new tab)LiabilitiesFree after registration
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Accounts receivableWhat customers owe us for invoices already issued
- Accounts payableWhat we owe vendors for bills already received
- InvoiceA claim on a customerConvention
- BillA claim against us
- Payment termsThe agreed timing of payment and any early-payment discount — Net 30, Net 30 EOM, 2/10 net 30, due on receipt; the due date that aging is measured fromConvention
- AgingGrouping open receivables or payables into buckets by days past due date — current, 1–30, 31–60, 61–90, 90+
- Payment runA batch of payments released togetherConvention
- SubledgerThe detail, by customer, vendor or asset, whose total must equal its control account in the GLConvention
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Order to cash (AR)The receivables stack from quote to revenue: quote → order → fulfillment → invoice → collection → cash application → revenue.
- Procure to pay (AP)The payables stack from requisition to reconciliation: requisition → PO → receipt → bill → approval → payment → reconciliation.
- Payment terms & due datesDue dates from payment terms, and whether an early-payment discount is worth taking.
- Journal entry for a sale on accountFor a sale on credit, debit Accounts receivable and credit Revenue for the price; under a perpetual inventory system also debit Cost of goods sold and credit Inventory for what the goods cost. When the customer pays, debit Cash and credit Accounts receivable.
- Journal entry for accounts payableWhen an approved vendor bill is entered, debit the expense or asset it bought and credit Accounts payable. When it is paid, debit Accounts payable and credit Cash.
- Journal entry for an inventory purchaseWhen inventory is bought on credit under a perpetual system, debit Inventory and credit Accounts payable. If an early-payment discount is taken, debit Accounts payable for the full bill, credit Cash for what is paid and credit Inventory for the discount.
- DSO calculatorDSO is a liquidity and working-capital metric, calculated as (Ending AR ÷ Credit sales for the period) × Days in the period.
- DPO calculatorDPO is a liquidity and working-capital metric, calculated as (Ending AP ÷ COGS for the period) × Days in the period.
- Accounts payable vs accounts receivableAccounts payable is what the company owes its suppliers, and it sits with the liabilities. Accounts receivable is what customers owe the company, and it sits with the assets.
- Accrued expenses vs accounts payableBoth are liabilities for costs already incurred. If the vendor's invoice has arrived and been approved, the cost is in accounts payable. If it hasn't, the month-end estimate is an accrued expense.
- Accounts payable process for startups: intake to paymentHow a bill moves from inbox to paid: intake, coding, approval, scheduling and recording, plus AP aging and who approves what at a 10-person startup.
- What to put on an invoice: a field-by-field guideThe fields a B2B invoice needs to get paid on time: legal names, a numbering sequence, dates, terms, tax lines, PO and remit-to, and how to fix one.
- AR aging and collections: a practical guide for startupsHow to read an AR aging, work out DSO, run a dunning cadence, record a promise to pay, escalate a late account and clear unapplied cash.
- Payment terms explained: Net 30, discounts and late feesHow to choose payment terms, count a due date, price an early-payment discount, set lawful late fees and work with enterprise procurement.
- How to pay vendors: ACH vs wire vs check vs cardACH, wire, check or card: what each payment rail costs, how long it takes, where the fraud risk sits, and how each payment is recorded in the books.