What Is Accounts Payable?

Jared King Avatar
Jared King
Share:

Accounts payable is the money that your business owes for any credit-based purchases. Accounts payable processes involve keeping track of your company's purchases when buying goods and services from suppliers and vendors—especially purchases for which you don’t pay cash at the time of the transaction. 

Staying on top of these debts is important for your company's health, success, and reputation. And properly managing outstanding costs—particularly when and how you pay them—will directly impact your cash flows and overall flexibility.

Whether you’re new to accounts payable or just need a refresher on its basic principles, this guide covers everything you need to know. 

Accounts Payable Definition

Accounts payable (A/P) is an accounting term that refers to any outstanding debts, such as bills or invoices, that your business will need to pay in the near future (typically in the next one to three months). These impending costs are recorded in your general ledger under a unique accounts payable category and on your company balance sheet as a liability. 

Accounts payable is also frequently used to refer to the surrounding personnel or department responsible for managing and resolving these debts.

What’s the Difference Between Accounts Payable and Accounts Receivable?

Accounts payable (A/P) is frequently mentioned in the same breath as accounts receivable (A/R), as both relate to cash transfers. Where accounts payable tracks the money you owe, accounts receivable is concerned with the money you owe.

Essentially, the two categories are the inverse of each other, so your A/P (the money you owe) is reflected in the A/R of your suppliers. And your A/R (the money owed to you) matches with the A/P of your customers. Or, to put it more simply, if you get an invoice, it's accounts payable. If you send an invoice, it's accounts receivable.

To explore this concept in greater detail, please see our article: Accounts Payable vs. Accounts Receivable.

What Is the Accounts Payable Process?

Depending on how your company is structured, and the number of purchases you make, the actual steps that your business might follow in its A/P processes will vary. But typically, they adhere to the same general structure.

Phase 1: Receive a bill

Any time you receive a request for payment—by mail, electronically, or any other method—you've begun the accounts payable process. Make the appropriate entries in your ledger and balance sheet to reflect the outstanding debt.

Phase 2: Verify the bill is accurate

Next, you'll want to confirm that the required fee corresponds to a legitimate purchase made by your business. Double-check that the invoice details match precisely with the goods or services you received—mistakes can happen. And check to see if the bill has already been paid or for any potential fraud indicators. Once you've performed your due diligence and obtained the necessary authorizations from your financial representatives, move on to the next phase.

Phase 3: Schedule your bill payment

You'll want to determine precisely when you want to actually pay the outstanding charge. By acting quickly, you might be able to secure an early payment discount. Conversely, by waiting until just before the due date, you can hold onto the associated funds longer and improve your cash standing.

Phase 4: Pay the bill

When the time comes, issue the specific payment. This may involve cutting a check or initiating a bank-to-bank transfer or any other method you've worked out with your vendors.

While the overall process seems fairly straightforward, there are a number of pitfalls you can run into. To optimize your A/P processes, take a look at some resources we've put together on the subject, including 10 accounts payable best practices.

Accounts payable examples

Need some real-world examples of accounts payable in action? Here are a couple of fun ones!

A/P Example 1:

It's the holidays, and your business—Quel Fromage—is being flooded with orders for your custom-made recreations of renaissance sculptures using artisanal cheeses. And while your stock of smoked edam and golden gruyere is still holding strong, you've recently needed to replenish your stores of mango manchego, so you purchase some from a trusted cheese vendor.

When you receive the invoice for this $400 purchase from your billing portal, your A/P staff will credit the accounts payable entry on your general ledger with the total and also record a corresponding debit to your raw materials expense. This debit will also be reflected on your income statement, as you've recorded the purchase transaction even though the appropriate cash hasn't yet been removed from your account.

Your staff then confirmed that you did, in fact, receive 250 pounds of mango manchego on the 28th of last month and that the charge is valid. After securing the necessary signatures from your finance head, your A/P team now schedules for the bill to be paid in next week's payment window to capitalize on an early-payer discount offered by the dairy. 

When the appropriate date arrives, you initiate an ACH transaction for $400, making sure to enter a corresponding credit to your cash account and debit to your accounts payable.

A/P Example 2:

You've mastered the art of dowsing—using a divining rod to locate underground water reservoirs—and you're receiving more service requests than you can personally handle, many of which are out of state. After teaching three new employees the tricks of the trade, you now have a Mobile Dowsing Team that you can send all over the country.

Rather than providing these new workers with company credit cards that could potentially be misused, you instead require them to cover the costs of their travel out of their own pocket, reimbursing them in the next pay cycle. In the past week, both Jedediah and Hieronymus flew to the Las Vegas area, each incurring a $235 roundtrip ticket. Meanwhile, Magdalena secured a rental car to cover her customers in Idaho and Utah for $337. And all three also incurred eating expenses for their travel days.

Once you've received their expense requests, you review them to verify that their charges all fall within the established limits and reflect valid business travel. Once confirmed, you pass along the information to your accountant, who notes each charge as a credit to your accounts payable ledger item and a debit to your travel account. And when your workers are compensated in the next payment cycle, your accountant will similarly credit your cash account and debit your accounts payable.

Accounts payable FAQs

Is accounts payable a liability or an expense?

While commonly mistaken for an operating expense, A/P is actually recorded on your balance sheet as a short-term liability.

Is accounts payable a debit or a credit?

Technically it's both, depending on which stage of the process you are considering. Since incoming invoices are listed as a liability, A/P is initially considered a credit reflecting the amount of money your company owes to its supplier or vendor. However, when those bills are eventually paid, you debit A/P so that your overall credit balance is decreased.

What is the accounts payable turnover ratio?

Also known as a payable turnover or creditor's turnover ratio, the A/P turnover ratio reflects the average number of payments made to creditors over a specific accounting period. This figure, in turn, serves as a short-term liquidity measure that can quantify how quickly a company pays off its suppliers, with a higher ratio considered to be more attractive.

AP Turnover Ratio

What are some accounts payable jobs?

Depending on the company's size , A/P might be covered by a single employee or an entire department. And while job titles vary across businesses, here are some common responsibilities covered by A/P staff:

  • Tracking outgoing payments
  • Reconciling discrepancies between invoices and purchasing records
  • Overseeing company expenditures (e.g., payroll)
  • Resolving vendor payment issues
  • Maintaining records and assisting with audits
  • Assembling reports
  • Negotiating vendor agreements
  • Monitoring for fraud

Of course, if you want to get the most of your A/P personnel, there are many accounts payable management strategies and techniques you can employ. 

Why should you automate accounts payable?

No matter how you structure it, your typical A/P processes will include several routine steps and repetitive tasks that must be done constantly and consistently. While these actions traditionally have been resolved with just manpower, accounts payable workflow automation has become a powerful tool in streamlining and simplifying accounts payable efforts. Typically, with an automated A/P process, your company can:

  • Reduce errors: Rather than manually transcribing incoming invoices to your payment systems, an e-invoicing or optical character recognition (OCR) tool can capture the relevant details quickly and accurately—without any transposed numbers.
  • Accelerate payments: With automated workflows that constantly move your received invoices through the process, fewer people need to be involved in each transaction, reducing the likelihood of process delays or bottlenecks.
  • Mitigate fraud: As you automate the verification steps accompanying each transaction, you remove the opportunity for human actors to engage in malfeasance and fraud. Further, these software-driven checks are more likely to detect subtle patterns or behaviors that your human staff might overlook.
  • Simplify reporting and auditing: With each step of the process being driven by a centralized platform, the relevant data and metadata associated with your A/P tasks can be easily traced, compiled, and shared.
  • Improve employee satisfaction: By offloading the most repetitive and mundane tasks from your workers, you help make their day less monotonous and free up resources to focus on more strategic activities, like vendor relationships.

Invoiced: Simple, Seamless A/P Automation

However complex your accounts payable processes might be, automation can help streamline your processes and improve insight into your company’s financial well-being. Invoiced’s accounts payable automation software helps businesses transform their A/P headaches into powerful, actionable resources.

We are known for providing businesses with simple, user-friendly accounts payable and accounts receivable tools that give you all of the capabilities you need and nothing you don’t.  

Whether you’re building your accounts payable processes from the ground up or are aiming to bring legacy systems into the modern era, Invoiced is here to help. 


Simply schedule your demo to get started today!

Jared King Avatar
Jared King
Share:

Get our A/R tips and tricks delivered

From us to your inbox weekly.