What is Accounts Payable? How It Works and Examples

When a business receives a vendor invoice, that transaction goes through accounts payable. Your business needs a reliable system for tracking supplier invoices, planning cash flow, paying bills, and recording current liabilities.

This guide explores everything you need to know about accounts payable, including its definition, core processes, examples, job roles, and automation tools.

What is Accounts Payable?

Accounts payable (AP) is the debt owed to vendors and suppliers (recorded on a company’s balance sheet) to which the company has received goods or services purchased on credit, but hasn’t paid the supplier. Your company’s accounts payable balance is the sum of all outstanding amounts not yet paid to vendors.

This liability account entails a company’s obligation to pay short-term liabilities to suppliers, vendors, or creditors. The full accounting entry of these transactions appears under current liabilities on a balance sheet. The term accounts payable describes both a business account and a department that processes and pays supplier invoices. It’s a form of accrual accounting.

Core Aspects of Accounts Payable

1) Vendor Master File Accuracy

Maintaining an accurate vendor file without duplication is essential for accounts payable. 

2) Recording Accounts Payable

Record the short-term, interest-free liability from outstanding vendor invoices, payments, and credit memos. Reduce the liability when invoices are paid. 

3) Verifying Vendor Invoices and Suppliers

During invoice processing, verifying the accuracy of vendor invoices and the validity of suppliers is essential to help prevent errors and fraud before approving and paying the invoices. Paying duplicate invoices should be avoided. 

Invoice verification steps include:

• Recalculation of invoice totals
• 3-way or 2-way matching with purchase orders and receiving report data
• Checking for potential exceptions, including duplicates, requiring follow-up

Supplier validation steps may include:

• Checking the URL, spelling, vendor name, and other invoice details to identify suspicious invoices
• TIN (taxpayer ID number) verification of suppliers
• AI-driven supplier behavior checks to identify potential fraud

4) Controlling Accounts Payable and Cash Flow

Effective management of accounts payable enables a more accurate record of your organization’s cash flow, strengthens vendor relationships, and creates opportunities for cost savings.

Tools for controlling accounts payable (in addition to invoice verification) include:

• Accounts payable aging report
• Cash flow management
• Payment reconciliation 
• Metrics calculation and trends
• Accounts payable and spending visibility

Accounts Payable Aging Report

The accounts payable aging report is a tool for controlling accounts payable. The detailed accounts payable aging report is organized by vendor, outstanding invoices, balance due, and current or days-past-due aging category, with grand totals. Businesses can also run a summary accounts payable aging report by vendor that doesn’t detail invoices. 

Cash Flow Management

Businesses can forecast one cash flow element using the accounts payable aging report to estimate the time when cash will be required for payments. When scheduling batch payments, your finance team should be able to view its cash requirements for planning upcoming expenditures. 

Accounts payable reflect how quickly a business is paying down debt. Your cash flow is important when growing a business. There are two expected scenarios with AP:

• Your company’s AP increases: This means that management is making more purchases on credit than paying cash or delaying payments.
• Your company’s AP decreases: This means that the company is paying off debt faster or purchasing less on credit. 

Managing a liability account is vital for positive cash flow throughout the year. Companies strive to keep good cash flow by paying off AP as quickly as possible. This is to avoid accruing interest or late fees and to earn early payment discounts.

Payment Reconciliation

To help ensure the accuracy of the accounts payable balance and amounts owed to vendors or suppliers, prepare a payment reconciliation for each batch payment. The accounts payable sub-ledger balance should trace to and agree with the general ledger. 

Accounts Payable Metrics

Your ERP, business accounting system, or financial analysts should calculate and monitor trends in applicable metrics. For specifics, see the Key Metrics to Track in AP section below. 

Accounts Payable and Spending Visibility

Businesses should strive to record accounts payable invoices in a timely manner for more accurate financial statements, cash forecasting, and spend control. Business spend reports can be analyzed by category or with custom queries to determine how to reduce costs. 

5) Supplier Relationships

Paying your vendors, suppliers, and other partners on time is the key to doing good business and maintaining a high business credit score. Failing to pay outstanding invoices aged 90 to 120 days may result in vendor shipment cutoffs, which can harm your company’s operations, revenue timing, cash inflows, and overall profitability.  

Offer suppliers a range of cost-effective payment options, including electronic fund transfers (EFTs) such as ACH, debit cards, global ACH (like SEPA), PayPal, and (only when justified), wire transfers. 

Besides appealing to suppliers, using payment methods other than paper checks reduces time-consuming AP tasks and theft or fraud risks. 

Examples of Accounts Payable

The accounts payable process is found across many industries. Here are a few examples of accounts payable scenarios that you might encounter:

• Utilities 
• Equipment
• Subcontractors
• Production materials
• Subscription or installment payments

AP also covers travel expenses, internal reimbursements, and vendor payments, all of which require strong cost controls and fraud prevention. To safeguard against errors and duplicate or fraudulent invoices, companies rely on internal controls, which are best reinforced through automation (see below).

How to Record Accounts Payable

Accounts payable is recorded using double-entry bookkeeping. When an invoice is received, you record an expense or asset (debit) and increase accounts payable (credit). When you pay the invoice, you reduce accounts payable (debit) and reduce cash (credit).

Double-entry Bookkeeping

For any accounting transaction, including recording accounts payable, businesses use double-entry bookkeeping with equal debits and credits on each side of the transaction. Journal entries may be used to record accounting transactions. The trial balance must have equal debit and credit totals before your company closes its books. 

Accounting Entries to Record and Reverse Accounts Payable

Record accounts payable when the invoice is received. Reverse accounts payable and record the reduction in cash for the payment amount when the supplier invoice is paid:

Recording Accounts Payable When a Supplier Invoice is Received:

1. Debit the asset or expense account related to the purchase
2. Credit the accounts payable account

For example, the asset account may be inventory. An example of an expense is consulting services. 

Reducing Accounts Payable When a Supplier Invoice is Paid:

3. Debit the accounts payable account
4. Credit the cash account used to make the payment

Reducing Accounts Payable When an Early Payment Discount is Taken

When earning and taking an early payment discount like 2/10, net 30, your company pays less cash and owes a smaller balance in cash to pay off its invoice. The entire accounts payable balance must be reversed with a somewhat different entry upon supplier invoice payment. 

When taking an early payment discount, record the supplier invoice payment instead as:

5. Debit the accounts payable account for the entire invoice balance
6. Credit the cash account used to make the payment for the discounted amount paid
7. Credit the early payment discounts account for the amount of the discount taken

Recording Accounts Payable through Payables Software

Businesses record accounts payable transactions through accounts payable software by coding expenses or assets purchased as debits upon invoice receipt. The payables software makes a balancing entry to credit the accounts payable account. 

When accounts payable invoices are paid, the accounts payable entry that reduces accounts payable as a debit and cash as a credit is automatically made through the software. Transactions from the accounts payable subledger are posted to the general ledger.  

Accounts Payable on the Balance Sheet

Accounts payable is always included on a business balance sheet as a line item. Because accounts payable is considered a liability, the interest-free money owed to creditors for accounts payable is listed under “current liabilities.” These are usually short-term expenditures that are in accounts payable for less than 90 days.

Example Accounts Payable Transactions

Company A buys raw materials inventory from Supplier B for $2,000 on credit. The supplier offers invoice payment terms of 2/10, net 30. This early payment discount term means that if Company A pays the vendor invoice within 10 days, it will receive a 2% discount on the $2,000 amount owed, which is $40. If not paid within 10 days, the full invoice balance is due in 30 days.

Upon supplier invoice receipt, the accounts payable entry is:

Upon supplier invoice payment, with no early payment discount taken:

Or, upon supplier invoice payment, when taking the early payment discount:

What is Accounts Payable in Accounting?

Accounts payable is a form of accrual accounting that requires double-entry bookkeeping. Unlike cash-basis accounting, accrual accounting recognizes that debts or obligations are not always paid right away. They must be recorded and tracked as accounts payable or another liability. 

The AP balance appears in the current liabilities section of the balance sheet at any given time. The company is responsible for paying off this short-term debt for supplier invoices within a specific timeframe to avoid late payments and potential shipment cut-offs from the vendor.

Supplier invoices are recorded as debits for inventory and fixed assets on your company’s balance sheet. Alternatively, they are recorded as expenses on the income statement, and the accounts payable entry adds the supplier invoice balance to accounts payable as a credit. 

The amount payable is primarily an IOU (short-term liability) from one company to another. The creditor will record the transactions in their sub-ledger and general ledger as an asset called accounts receivable.

Accounts Payable as Department and Process

Accounts payable may also refer to the department responsible for supplier invoice processing. 

The AP process involves invoice management in these steps:

1. Receiving invoices
2. Verifying invoices
3. Routing and receiving invoice approvals
4. Making payments
5. Updating records

Accounts Payable Comparison Tables

These tables compare Accounts Payable vs Accounts Receivable and Accounts Payable vs Trade Payables. 

Table 1: Accounts Payable vs Accounts Receivable

In short, accounts payable represent money your business owes suppliers, while accounts receivable represent money owed to you by customers. Both impact cash flow, but in opposite directions.

Table 2: Accounts Payable vs Trade Payables

Trade payables are a subset of accounts payable, limited to inventory-related purchases. While many companies use the terms interchangeably, AP is broader and includes all short-term obligations.

Some examples of trade payables include:

• Raw materials purchased by manufacturers
• Ingredients purchased by restaurants and cafes
• Clothing sold by retailers
• Parts purchased by automotive manufacturers

Anything that a company needs to keep operations running is considered direct spend.

Domestic vs International AP

Domestic and international accounts payable (AP) are handled differently. When international suppliers’ invoices aren’t denominated in dollars (or the payer’s home currency), foreign currency must be considered in accounting for and paying invoices due in foreign currencies. 

Businesses may consider hedging international payables to lock in a currency rate and avoid currency fluctuations between the invoice date and payment date. Hedging payables is a planning strategy to gain more control over the payables amount due in another currency. 

By making cross-border payments to international suppliers in their preferred local currencies and payment methods, your business can improve its supplier relationships. 

Key Metrics to Track in AP

Track these accounts payable metrics and their trends over time. Add software tools to improve metrics, better control your accounts payable balances, achieve cost savings, and add AP efficiency. 

Key accounts payable metrics include:

• Days payable outstanding (DPO) or accounts payable turnover ratio
• Accounts payable invoice processing cost 
• Invoice processing time
• Payment errors
• Percentage of discounts captured

Days Payable Outstanding (DPO) or Accounts Payable Turnover Ratio

Your business can choose to use a metric for either days payable outstanding or accounts payable turnover ratio. Both metrics measure your company’s average rate of AP invoice payment. 

Days Payable Outstanding

DPO is a working capital ratio that shows the average number of days a company takes to pay its accounts payable.

DPO Formula

Days Payable Outstanding = (Average Accounts Payable ÷ Cost of Goods Sold) × Average Number of Days in Accounting Period

DPO Example

If average AP is $2,000,000, COGS is $15,000,000, and the accounting period is 365 days:

DPO = (2,000,000 ÷ 15,000,000) × 365 = 48.7 days

How to interpret:

• A moderate DPO (e.g., ~49 days) indicates reasonable payment timing, though suppliers may start asking about expected payments.
  
• A high DPO (70+ days) suggests delayed payments beyond typical supplier terms (often net 30 or 2/10, net 30), which could signal cash flow strain.
  
• A low DPO means the company pays quickly, which can strengthen supplier relationships but may reduce available cash.

Accounts Payable Turnover Ratio

Instead of calculating Days Payable Outstanding, your business may prefer to use the Accounts Payable Turnover Ratio (APT ratio) to calculate how fast credit purchases in accounts payable are paid on average. 

A high accounts payable turnover ratio means a company pays its bills in a short period of time. In contrast, a lower turnover ratio could suggest that a business is struggling to pay its invoices, although this isn’t always the case.

The formula for Accounts Payable Turnover Ratio is:

(Total net credit purchases from all suppliers during the period) / (Average accounts payable balance for the period)

For example, if Company A’s total supplier purchases, with credit terms, amount to $60,000,000 and the average accounts payable is $4,000,000, Company A’s accounts payable turnover is 15 times per year.

Accounts Payable Invoice Processing Cost

This metric measures the cost of processing AP invoices, either per invoice or per $1,000 of revenue, as defined by APQC and reported in CFO Magazine’s Metric of the Month (2018 and 2025).

Per-invoice processing cost, or cost per $1,000 of revenue, measures the amount of funds that your business spends to process AP invoices relative to its revenue level. Costs vary by industry and are heavily influenced by whether invoices are handled manually or with automation.

When your business efficiently completes invoice processing, it can take lucrative early payment discounts offered by suppliers, such as 2/10, net 30. Tracking the percentage of early payments taken vs. offered provides insights into the cost-effectiveness of your accounts payable department, helping your business control spending. 

Invoice Processing Time

Invoice processing time is the duration of time between supplier invoice receipt and invoice payment, measured in number of days. 

The slower the invoice processing time, the more your business could benefit from digital transformation to:

• Replace manual accounts payable processes
• Speed approvals
  • By streamlining and removing bottlenecks 
  • Instituting anywhere, anytime approvals
• Use better EFT payment methods instead of time-consuming and expensive paper checks and international wire transfers

Payment Errors

The number of invoice payment errors measures how many times your company pays duplicate invoices, overpays invoices, or pays the wrong supplier, unnecessarily costing your business money and extra time to resolve differences with suppliers.  

Percentage of Discounts Captured

The metric, percentage of discounts captured, expresses the rate at which your company takes early payment discounts like 2/10, net 30, offered by suppliers. If your company misses the early payment discounts, it may indicate slow invoice processing, missed deadlines, or cash flow insufficiency. 

Common Job Roles and Responsibilities in Accounts Payable

There are over 400 different job titles and roles for accounts payable in the United States. What are some more common ones?

• Accounts Payable Specialist
• Billing Specialist
• Accounts Payable Associate
• AP Clerk
• AP Coordinator
• Accounts Payable Accountant

When it comes to AP responsibilities, they vary widely depending on factors such as industry, company size, and inventory. Here are some of the more well-known AP responsibilities that are shared across all business sectors:

• Review all invoices and ensure they’re matched with the appropriate documents
• Perform data entry for the general ledger (if manual processes are used)
• Execute bank account and credit card reconciliation
• Obtain approval from appropriate parties
• Pay invoices
• Assist financial managers and senior financial officers as needed

Check out these 6 simple steps to get started with AP automation right now.

Take Control of Your Accounts Payable with Automation

By performing invoice processing and keeping track of your accounts payable with AP automation, you will gain efficiency for making timely payments to reduce costs and improve supplier relationships. You will have a deeper understanding of your company’s cash flow and spending, collect crucial data for better financial reporting, and improve tax compliance.

The accounting process is highly subject to human error, especially during manual data entry. Paper invoices also cause problems because documents can get lost or duplicated. Such issues result in high cost-per-invoice metrics. That’s why companies are turning to accounts payable automation to streamline AP business processes. 

Automation Strengthens Internal Controls

A major advantage of accounts payable automation is that it embeds strong internal controls into every step of the process. Instead of relying on manual oversight, automation enforces safeguards that protect company cash and reduce fraud risk.

Key ways automation supports internal controls include:

• Segregation of duties: Automated approval workflows ensure no single employee can create, approve, and release a payment.
  
• Duplicate and fraud prevention: AI-driven invoice scanning flags duplicate invoices, suspicious vendor data, or anomalies before payment is processed.
  
• Vendor management checks: Automated systems validate supplier information, run OFAC/AML compliance screenings, and confirm banking details.
  
• Audit-ready visibility: Every action is logged in a clear audit trail, making it easier to track approvals, exceptions, and payments for compliance and financial reporting.

With these built-in controls, automation speeds up accounts payable, reduces errors, strengthens governance, and protects company assets.

Tipalti AP Automation

Tipalti AP automation is add-on cloud accounting software that integrates with your ERP or accounting system to replace manual accounts payable processes. The Tipalti AP automation system enhances the AP process and provides functionality for:

• Vendor and supplier management: The Supplier Hub shifts tax form collection and vendor data entry to suppliers, reducing manual work and errors.
• Multi-entity support: Manage AP across multiple business entities with consolidated or segmented views.
• Automated invoice processing: AI-powered Smart Scan uses OCR and machine learning to capture, code, and process invoice data.
• PO matching: Two- and three-way purchase order matching prevents overspending and improves financial controls.
• Fraud and risk prevention: Tipalti Detect™ uses behavioural monitoring, vendor validation, and 26,000+ payment rules to flag exceptions and prevent fraud.
  Regulatory compliance: Automated checks against OFAC and validation of bank routing/SWIFT/IBAN codes ensure global compliance.
• Global supplier payments: Pay vendors in 200+ countries and territories, using 50+ payment methods and 120+ currencies.
• Payment reconciliation: Automatic syncing with your accounting system speeds financial close and reduces reconciliation errors.
• Tax compliance:  Built-in 1099/1042-S reporting and e-filing integrations simplify tax preparation.
• Business intelligence: Real-time spend visibility and AI-driven reporting help teams make smarter financial decisions.
• Tipalti AI: Tipalti’s integrated payables intelligence platform is designed to enable controllers to proactively reduce process risks and errors. 

By combining automation, intelligence, and global scale, Tipalti helps finance teams not only pay vendors accurately and on time but also gain the visibility and control needed to drive stronger business outcomes. 

Optional Finance Automation Software Products Extending AP

Tipalti offers a unified platform of finance automation products. 

Tipalti’s optional Expense Management product combines with Tipalti AP automation. Expense Management enables employees to submit expense claims using mobile app photos easily and handles approvals. Tipalti AP automation can then process reimbursable employee expenses, such as travel expenses, within accounts payable.

Businesses experiencing international growth or using a global supply chain can integrate Tipalti’s advanced currency management products, Multi-FX and FX Hedging, to simplify making multi-currency, cross-border payments and lock in currency rates between the invoice date and the payment date.  Your business can extend AP automation with Tipalti’s Procurement product, which simplifies purchase requisition and approval and automatically creates purchase orders.

Summing it Up

Accounts payable and cash management professionals are vital assets for a business, helping to ensure financial stability at every turn.

Accounts payable is a key function. It’s a financial process that involves accepting invoices, verifying them, making payments, and recording the data.

However, a disorganized AP department faces many challenges. When vendors are not paid on time, it strains relationships, slows down the supply chain, and eliminates opportunities for payment discounts. 

AI-driven accounts payable automation is essential, with automated controls for approval, OCR scanning, multi-payment processing, vendor management, and so much more. 

Whether you run a small business or a large operation, accounts payable automation software will bridge the gaps in your workflows, leading to cost reduction, happier suppliers, more motivated employees, and a clearer picture of financial health. Get started with AP automation.