# 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.

Source: https://lopifi.com/learn/money-in-and-money-out
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What are accounts payable and accounts receivable, and how does a startup run them?** 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](https://lopifi.com/md/glossary/accounts-receivable) on one side and [accounts payable](https://lopifi.com/md/glossary/accounts-payable) on the other.

## Money in

On September 15 Northwind delivered goods to a trade customer and sent an [Invoice](https://lopifi.com/md/glossary/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.

*[Journal entries: JE-7, JE-10]*

JE-7 and JE-10: invoiced, then partly collected.

*[Figure: invoice lifecycle]*

Northwind's September invoice through its life, with the payment received against it.

## Money out

On September 3 a supplier delivered $18,000 of stock with a [Bill](https://lopifi.com/md/glossary/bill) on 30-day [terms](https://lopifi.com/md/glossary/payment-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.

*[Journal entries: JE-4, JE-9]*

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](https://lopifi.com/md/learn/what-is-accounts-payable) walks the whole loop.

|  | Money in (AR) | Money out (AP) |
| --- | --- | --- |
| The document | An invoice Northwind sends | A bill a vendor sends Northwind |
| The entry when it's issued | Dr accounts receivable, Cr revenue | Dr the cost or asset, Cr accounts payable |
| The list behind it | Open invoices, by customer | Unpaid bills, by vendor |
| How it's watched | An [Aging](https://lopifi.com/md/glossary/aging) report: how long each invoice has been open | Due dates and the next [payment run](https://lopifi.com/md/glossary/payment-run) |
| It closes when | The customer's payment is applied to the invoice | The approved bill is paid |
| September's open balance | 8,000 | 6,000 |

The two loops side by side.

Each list is a [Subledger](https://lopifi.com/md/glossary/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](https://lopifi.com/md/learn/order-to-cash-process), [how to write an invoice](https://lopifi.com/md/learn/how-to-write-an-invoice), [collections](https://lopifi.com/md/learn/how-to-collect-unpaid-invoices) and [the AR aging report](https://lopifi.com/md/learn/ar-aging-report-dso-cei). On the way out, [approvals and three-way match](https://lopifi.com/md/learn/purchase-orders-and-three-way-match), [payment runs](https://lopifi.com/md/learn/vendor-payment-runs-and-fraud-controls) and [AP aging](https://lopifi.com/md/learn/ap-aging-and-days-payable-outstanding). Both use these same September entries.

## Where this lesson's rules come from

- [ASC 310](https://asc.fasb.org/310/tableOfContent) — Receivables (codification)
- [ASC 405](https://asc.fasb.org/405/tableOfContent) — Liabilities (codification)

## Read further

- https://lopifi.com/md/journal-entries/sale-on-account
- https://lopifi.com/md/journal-entries/accounts-payable
- https://lopifi.com/md/journal-entries/inventory-purchase
- https://lopifi.com/md/calculators/dso
- https://lopifi.com/md/calculators/dpo
- https://lopifi.com/md/differences/accounts-payable-vs-accounts-receivable
- https://lopifi.com/md/differences/accrued-expenses-vs-accounts-payable
- https://lopifi.com/md/startups/accounts-payable-process-for-startups
- https://lopifi.com/md/startups/what-to-put-on-an-invoice
- https://lopifi.com/md/startups/ar-aging-and-collections
- https://lopifi.com/md/startups/payment-terms-net-30-explained
- https://lopifi.com/md/startups/how-to-pay-vendors-ach-wire-check-card
- https://lopifi.com/md/accounting/accounts-receivable
- https://lopifi.com/md/accounting/accounts-payable
- https://lopifi.com/md/tools/terms
- https://lopifi.com/md/docs/domain/05-order-to-cash
- https://lopifi.com/md/docs/domain/06-procure-to-pay

- **Track:** [Back office core](https://lopifi.com/md/learn/core)
- **Lesson:** Lesson 6 of 9 — 8 min
- **Terms taught:** [Accounts receivable](https://lopifi.com/md/glossary/accounts-receivable), [Accounts payable](https://lopifi.com/md/glossary/accounts-payable), [Invoice](https://lopifi.com/md/glossary/invoice), [Bill](https://lopifi.com/md/glossary/bill), [Payment terms](https://lopifi.com/md/glossary/payment-terms), [Aging](https://lopifi.com/md/glossary/aging), [Payment run](https://lopifi.com/md/glossary/payment-run), [Subledger](https://lopifi.com/md/glossary/subledger)
- **Previous:** [People: employees and contractors, Core · Lesson 5](https://lopifi.com/md/learn/hiring-employees-and-contractors)
- **Next:** [The founder's annual calendar, Core · Lesson 7](https://lopifi.com/md/learn/startup-back-office-calendar)
- **The course:** https://lopifi.com/md/learn