We present a microscopic picture of quantum transport in the Aharonov-Bohm (AB) interferometer taking into account the electron interaction within the Hartree and the spin density-functional theory approximations. We discuss the structure of the edge states for different number of Landau levels in the leads, their coupling to the states in the central island, and the formation of compressible/incompressible strips in the interferometer. Based on our results, we discuss the existing theories of the unexpected AB periodicity, which essentially rely on specific phenomenological models of the states and their coupling in the interferometer. Our work provides a basis for such theories, giving a detailed microscopic description of the propagating states and the global electrostatics in the system at hand. © 2008 The American Physical Society.