A/R and A/P: Managing Receivables and Payables After the Document
The work that actually starts once an Invoice or Vendor Bill is recorded — credit control, collection, payment scheduling, and the reconciliation that keeps the sub-ledger equal to the general ledger.
Order to Cash and Procure to Pay stop the moment the document is issued. What happens afterwards — chasing, scheduling payment, keeping balances sensible — is the territory of A/R and A/P. This is where most of a finance team's time actually goes, and where systems most often let them down.
The two mirror each other. Once you see the pattern, a question on one side almost always has a counterpart on the other.
| Aspect | A/R (Receivables) | A/P (Payables) |
|---|---|---|
| Created by | An invoice to a customer | A vendor bill from a supplier |
| Increases when | The bill is issued | The supplier's bill is recorded |
| Decreases when | Payment is received | Payment is sent |
| Account type | Asset | Liability |
| Ageing report | A/R Aging | A/P Aging |
| Main risk | Money never collected | Late payment, penalties, supply stopping |
| Its measure | DSO — average days to collect | DPO — average days to pay |
Sub-ledger and control account
The detail per customer and per supplier lives in a sub-ledger, while the general ledger holds a single total on a control account. The two must agree. The idea sounds administrative until the day A/R Aging shows a different number from the Balance Sheet and nobody can say which one is right.
Credit control: prevention is cheaper than collection
Credit limits and payment terms are set on the customer master record. What determines whether they work is not the size of the number but the point at which the limit is enforced.
| Enforcement point | Effect | Consideration |
|---|---|---|
| Sales Order | The order cannot be approved | Earliest and cheapest; this is the built-in behaviour of most ERPs |
| Item Fulfillment | Goods cannot leave the warehouse | Catches older orders that passed while the limit was still comfortable |
| Invoice | The bill cannot be issued | Too late — the goods are already with the customer |
The difference between the first two points only becomes visible after a few months of operation. A Sales Order can be approved today while the customer's balance is healthy, then shipped three weeks later when their receivable has piled up. A check that only stands at the Sales Order will never see that.
A parent-and-branch customer structure adds one more question: whose limit is it. If the parent and each branch both carry a limit, it has to be explicit whether branch usage consumes the parent's. Without that agreement, a customer group can exceed its combined limit while every branch looks safe on its own.
The collection cycle
- 01Read the A/R Aging and group by age and value.
- 02Set priorities — one large invoice 60 days past due matters more than many small ones a week late.
- 03Chase, then record the promise to pay and its date in the system, not in a collector's private notes.
- 04Escalate when a promise is broken, and revisit that customer's credit limit.
- 05For genuinely stuck balances, agree a provision or write-off with finance — with a clear approval trail.
The payment cycle
- 01Supplier bills are recorded and matched against purchase orders and goods receipts.
- 02Matched bills enter the approval queue; unmatched ones are held with a recorded reason.
- 03A payment run is scheduled against due dates and available cash.
- 04Early-payment discounts are evaluated — often worth more than holding the cash.
- 05Payments are executed and then reconciled against the bank statement.
The numbers to watch
DSO = (Receivables Balance / Credit Sales) x Days in Period
DPO = (Payables Balance / Credit Purchases) x Days in Period
Cash cycle = DSO + Inventory Days - DPOA rising DSO means money is sitting with customers longer. A DPO that is too low means the company pays sooner than it needs to, unless a discount justifies it. Both are read as trends rather than single figures — one odd month can simply be a matter of when invoices went out.
Problems that keep recurring
- A payment is received but not applied to a specific invoice — cash rises, receivables do not fall, and ageing shows bills that are in fact settled.
- A partial payment is recorded as settlement in full, so the remaining balance disappears from view.
- A credit memo is issued but never linked to its invoice, making the customer balance look larger than it is.
- One customer or supplier exists as several records, splitting the balance and defeating the credit limit.
- A supplier bill arrives with no purchase order, so there is nothing to match before paying.
- Foreign-currency receivables are not revalued, leaving their local-currency value stale in the reports.