Accounts receivable vs accounts payable

Accounts receivable is money customers owe you for goods or services you have already invoiced. Accounts payable is money you owe your suppliers for bills you have received but not yet paid. In UK accounts they are usually called trade debtors and trade creditors, and the difference between them drives your cash flow.

What is the difference between accounts receivable and accounts payable?

Receivables are an asset because cash is coming in; payables are a liability because cash is going out. The table sets out the main differences.

The same invoice sits on both sides. If your joinery firm bills a builder £1,200, it is a receivable in your books and a payable in the builder’s books until the money moves.

Where do they appear on a UK balance sheet?

Receivables and payables appear under separate statutory headings. Schedule 1 to the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 sets the Format 1 balance sheet headings that most small UK companies use:

• Current assets, Debtors: includes trade debtors, amounts owed by group undertakings, and other debtors.
• Creditors: amounts falling due within one year: includes bank loans and overdrafts, trade creditors, amounts owed to group undertakings, and other creditors.

Trade debtors and trade creditors are the receivables and payables from normal trading. Loans to directors and HMRC balances usually go under other debtors or other creditors. Our guide to the balance sheet format shows the full layout.

How does an invoice move through each ledger?

A sale on credit creates a receivable when you invoice and clears it when you are paid. The steps are:

1. You send a sales invoice. Record the sale and a trade debtor in the sales ledger.
2. The invoice falls due. Without agreed terms, it is late 30 days after the customer receives it.
3. The customer pays. Record the cash and clear the debtor.
4. If they do not pay, chase, add statutory interest, or write the debt off.

A purchase on credit works the other way round. You record the supplier’s bill as a trade creditor in the purchase ledger, then clear it when you pay. If you issue a refund or correction, use a credit note rather than editing the original invoice.

How do you measure receivables and payables?

Debtor days and creditor days show how fast cash moves in and out. Use these formulas:

• Debtor days = trade debtors ÷ annual turnover × 365
• Creditor days = trade creditors ÷ annual credit purchases × 365

Here is a worked example for a small business, using our own illustrative figures.

This business pays suppliers about nine days before its customers pay it, so it has to fund that gap from cash or borrowing. Our guide to working capital explains how to close it.

What payment terms apply by law?

UK law sets a default payment period if you have not agreed one. GOV.UK’s late payment guidance says:

• with no agreed date, payment is late 30 days after the customer receives the invoice, or after delivery if later
• agreed terms should usually be no more than 30 days for public authorities and 60 days between businesses
• businesses can agree longer than 60 days only if it is fair to both sides

When a business customer pays late, you can charge statutory interest at 8% a year plus the Bank of England base rate, plus fixed compensation. Our late payment interest guide sets out the current rate, and the late payment interest calculator works out the sum.

How do VAT rules affect receivables and payables?

Under standard VAT accounting you pay VAT on a sale when you invoice, even if the customer has not paid. Two HMRC rules help.

Bad debt relief. VAT Notice 700/18, updated 18 September 2025, lets you reclaim the output VAT on an unpaid debt if:

• you have already accounted for and paid the VAT
• the debt is at least 6 months past the later of the due date and the supply date
• you have written it off in a separate bad debt account
• you claim within 4 years and 6 months of that later date

The rule also bites on payables. If you do not pay a supplier within 6 months of the later of the supply date and the due date, you must repay the input VAT you reclaimed.

Cash accounting. The VAT Cash Accounting Scheme lets businesses with VAT taxable turnover of £1.35 million or less pay VAT on sales only when customers pay, and reclaim VAT on purchases only once they have paid.

Do sole traders need to track receivables?

Yes for running the business, but often not for tax. GOV.UK describes the cash basis as the standard way for sole traders and most partnerships to record income and expenses for Self Assessment. You count income when you receive it, so unpaid invoices are not taxed until they are paid. Limited companies cannot use the cash basis and must include debtors and creditors in their accounts.

What to do now

1. Run an aged debtors report each month and chase anything over terms using our guide to chasing an unpaid invoice.
2. Set clear payment terms on every invoice and contract.
3. Review debts over 6 months old for VAT bad debt relief.
4. Check supplier bills over 6 months old so you do not breach the input VAT repayment rule.

Frequently asked questions

Is accounts receivable an asset or a liability?

Accounts receivable is a current asset, because it is money due to come into the business, usually within a year.

Is accounts payable a debit or a credit?

Accounts payable is a liability, so it carries a credit balance. Paying a supplier debits accounts payable and credits the bank.

What is the UK term for accounts receivable?

UK company accounts call it trade debtors, shown under debtors in current assets. Accounts payable is called trade creditors.

What are debtor days?

Debtor days measure how long customers take to pay: trade debtors divided by annual turnover, multiplied by 365.

Can I reclaim VAT on an invoice a customer never paid?

Yes, through VAT bad debt relief, once the debt is 6 months past the later of the due date and the supply date and you have written it off.