Accounts payable and receivable

In short

Accounts payable (AP) is money a business owes its suppliers; accounts receivable (AR) is money its customers owe it. AP and AR are the two highest-volume ledger processes in any company, so they decide working capital, cash flow and the balances shown as trade payables under current liabilities and trade receivables under current assets in the balance sheet. B.Com exams test the journal entries, control accounts, ageing and ratios; Indian employers — shared service centres of Deloitte, Genpact, WNS, Infosys BPM, TCS and every manufacturer's finance team — hire freshers almost entirely into AP/AR "O2C" and "P2P" roles, and interview on exactly this ground.

Explained

Accounts payable: the purchase-to-pay (P2P) cycle

• Steps: purchase requisition → purchase order (PO) → goods receipt note (GRN) → supplier invoice → three-way match (PO vs GRN vs invoice) → approval → payment → vendor reconciliation.
• Three-way match is the core control: quantity, rate and amount must agree across the three documents; mismatches are held as "blocked invoices" and queried.
• Entries: on purchase, Purchases/Expense A/c Dr, Input GST Dr, to Sundry Creditors; on payment, Sundry Creditors Dr, to Bank (and to TDS payable if tax is deducted).
• Statutory checks before payment: valid GST invoice with supplier GSTIN and HSN, invoice reflected in GSTR-2B (input tax credit is now allowed only if it appears there), e-invoice (IRN) where the supplier crosses the turnover threshold, and TDS deducted under the Income-tax Act, 2025 on contracts, professional fees, rent and commission. Rates and thresholds change in each Finance Act — confirm the current ones before applying.
• MSME discipline: under the MSMED Act, 2006 payment to a registered micro or small enterprise is due within the agreed period, not exceeding 45 days; delay attracts compound interest at three times the RBI bank rate, and income-tax law disallows the expense if the dues are unpaid beyond the due date.
• Controls: segregation of duties (whoever creates a vendor must not approve payment), duplicate-invoice check, vendor master verification of bank details, debit notes for purchase returns and rate differences.

Accounts receivable: the order-to-cash (O2C) cycle

• Steps: customer master and credit limit → sales order → dispatch and tax invoice (with e-invoice/e-way bill where applicable) → ledger posting → collection follow-up → receipt and cash application → ageing and dispute resolution → provision or write-off.
• Entries: on sale, Sundry Debtors Dr, to Sales and Output GST; on receipt, Bank Dr (and Discount Allowed Dr), to Sundry Debtors.
• Credit control tools: credit limits and credit period, credit rating of the buyer, advance or security deposit, cash discount for early payment ("2/10 net 30"), interest on overdue, stop-supply after a set ageing bucket, and factoring or bill discounting to convert receivables into cash.
• Ageing analysis buckets balances as not due, 0–30, 31–60, 61–90, 91–180 and above 180 days; Schedule III of the Companies Act, 2013 requires a trade receivables and trade payables ageing schedule in the notes to accounts.
• Bad and doubtful debts: bad debts written off (Bad Debts A/c Dr, to Debtors) and a provision for doubtful debts created on the remaining balance. Under Ind AS 109 listed and larger companies must use the expected credit loss (ECL) model — a loss allowance based on a provision matrix of historical default rates, not just on specifically identified defaulters.

Control accounts, reconciliation and KPIs

• Subsidiary ledgers hold one account per vendor or customer; the Sundry Creditors / Sundry Debtors control account in the general ledger must equal the total of its subsidiary ledger.
• Vendor and customer reconciliation: compare the supplier's statement of account with our ledger; typical differences are goods in transit, unposted debit/credit notes, TDS deducted by us, cash discount, and timing of payments in transit.
• Why not net them: a balance payable to and receivable from the same party is offset only with a written set-off agreement; otherwise AP and AR are shown separately (no netting of assets and liabilities).
• KPIs: DSO, DPO, ageing percentage beyond credit period, collection efficiency, unapplied cash, invoices processed per FTE, first-time-match rate.

Key points

• Accounts payable – current liability; trade creditors arising from credit purchases of goods and services.
• Accounts receivable – current asset; trade debtors arising from credit sales, net of provision for doubtful debts.
• P2P / O2C – the industry names for the AP and AR cycles; interviewers use these terms.
• Three-way match – PO, GRN and invoice must agree before an invoice is passed for payment.
• GRN – proof that goods were actually received; without it an invoice is not payable.
• Debit note / credit note – issued for purchase returns and rate differences (payable side) and sales returns and discounts (receivable side); GST credit notes must be reported in returns.
• DSO – average days to collect; DPO – average days taken to pay; both in days.
• Ageing schedule – mandatory disclosure for trade receivables and payables under Schedule III.
• ECL (Ind AS 109) – forward-looking provision matrix for doubtful receivables.
• MSMED 45-day rule – outer limit for paying registered micro and small suppliers; interest for delay.
• GSTR-2B – the statement that governs eligibility of input tax credit on purchases.
• Control account – general ledger total that must tie to the subsidiary ledger balances.

Formulas and examples

Example 1 — DSO, DPO and the cash cycle. Credit sales ₹1,46,00,000; opening debtors ₹18,00,000, closing ₹22,00,000. Credit purchases ₹73,00,000; opening creditors ₹9,00,000, closing ₹11,00,000. Inventory days 40.

1. Average debtors = (18,00,000 + 22,00,000)/2 = ₹20,00,000.
2. DSO = 20,00,000 ÷ 1,46,00,000 × 365 = 50 days; debtors turnover = 1,46,00,000 ÷ 20,00,000 = 7.3 times.
3. Average creditors = (9,00,000 + 11,00,000)/2 = ₹10,00,000.
4. DPO = 10,00,000 ÷ 73,00,000 × 365 = 50 days; creditors turnover = 7.3 times.
5. Cash cycle = 40 + 50 − 50 = 40 days. If the credit period allowed is 30 days, collections are running 20 days late and need tighter follow-up.

Example 2 — bad debts and provision. Debtors ₹8,00,000. Write off ₹30,000 as bad; create 5% provision for doubtful debts and 2% provision for discount on debtors; existing provision for doubtful debts ₹18,000.

1. Debtors after write-off = 8,00,000 − 30,000 = ₹7,70,000.
2. New provision for doubtful debts = 5% × 7,70,000 = ₹38,500.
3. Charge to P&L for doubtful debts = 30,000 + 38,500 − 18,000 = ₹50,500.
4. Provision for discount = 2% × (7,70,000 − 38,500) = 2% × 7,31,500 = ₹14,630.
5. Balance sheet: 7,70,000 − 38,500 − 14,630 = ₹7,16,870 shown as trade receivables.

Where it is used

• Finance shared services and GCCs (Genpact, WNS, Infosys BPM, Accenture, Deloitte USI): AP invoice processing, cash application and collections executives — the largest fresher hirer of B.Com graduates.
• Manufacturing and retail finance teams (Tata, Mahindra, Asian Paints, DMart): vendor reconciliation, GRN-invoice clearing, debtor ageing reviews and credit control.
• Audit and accounting firms: debtors and creditors confirmations, subsequent-receipt testing, MSME and Schedule III ageing disclosures.
• ERP and accounting roles: AP/AR modules in Tally Prime, SAP FICO, Oracle and Zoho Books; GSTR-2B reconciliation for input tax credit.

Interview questions

• Q: What is the three-way match? A: Checking the purchase order, goods receipt note and supplier invoice for the same quantity, rate and value before approving the invoice for payment.
• Q: How do AP and AR affect working capital? A: Receivables and inventory lock up cash while payables fund it, so the cash cycle is inventory days plus DSO minus DPO — shorter is better.
• Q: What does a high DSO indicate? A: Collections are slow relative to credit sales — weak credit control, disputed invoices or a loose credit period — tying up cash and raising bad-debt risk.
• Q: Difference between bad debts and provision for doubtful debts? A: Bad debts are confirmed losses written off the debtor's account; a provision is an estimated allowance against debtors that may not be recovered, charged to the P&L.
• Q: What is a debit note in payables? A: A document raised on a supplier to reduce the amount payable for returns, rejections, short supply or rate differences.
• Q: Why is GSTR-2B reconciliation done before paying a vendor? A: Input tax credit can be claimed only if the supplier has reported the invoice there, so an unmatched invoice means the GST portion may not be recoverable.
• Q: What are the main differences in a vendor reconciliation? A: Goods in transit, unposted debit or credit notes, TDS deducted, cash discount taken, and payments or receipts in transit at the cut-off date.

Common mistakes

• Posting a purchase or sale to the control account only and not to the party's subsidiary ledger, so the two no longer tie.
• Netting a customer balance against the same party's supplier balance without a set-off agreement.
• In provision sums, applying the new provision rate to debtors *before* deducting bad debts written off, or forgetting to credit back the existing provision.
• Confusing a provision for discount on debtors (computed after deducting the doubtful-debts provision) with discount allowed actually recorded.
• Treating all current liabilities as accounts payable — trade payables exclude statutory dues, salaries payable and loans.
• Quoting old TDS or GST thresholds from memory; these change with each Finance Act and notification.

Related topics

• Month-end close and reconciliations · Tally Prime basics · Financial reporting and MIS in Excel · Working capital management and ratio analysis · GST returns and input tax credit