Accounts payable is the short-term liability on a company’s balance sheet representing money owed to suppliers or vendors for goods and services received on credit.
Key Takeaways
- Accounts payable is the balance of not-yet-paid supplier invoices (with payment terms) for which your business has received goods or services on credit.
- Accounts payable is generally a credit balance on the balance sheet, classified under current liabilities.
- Accounts payable invoice processing spans supplier invoice receipt and recording, invoice verification, matching, approval, and payment.
- Accounts payable automation speeds up these steps, reduces errors, improves efficiency, and strengthens financial controls.
When a business receives a vendor invoice, the transaction is processed through accounts payable. Your business needs a reliable system to track supplier invoices, plan cash flow, pay bills, and record current liabilities. The accounting term, accounts payable, may be called AP, payables, or bills payable.
This guide explores what you need to know about accounts payable, including its meaning, core processes, examples, and automation tools.
What is accounts payable?
The accounts payable liability account represents a company’s obligation to pay short-term amounts owed to suppliers or vendors for goods and services received on credit. In the financial statements, accounts payable appears within current liabilities on the balance sheet. Accounts payable is recorded under accrual accounting.
Accounts payable invoices are generally due within the payment terms agreed upon with the supplier and typically do not accrue interest when paid on time.
Core aspects of accounts payable
To better understand accounts payable in accounting, consider its core aspects.
1. Vendor Master File Accuracy
Maintaining an accurate vendor file without duplication is essential for accounts payable. Traditional accounts payable systems that require manual data entry are prone to human error, including vendor duplication, typos, and outdated information. The vendor file data should be cleaned before migrating to a new ERP or AP automation system.
2. Recording Accounts Payable
Record the short-term, interest-free liability from outstanding vendor invoices, payments, and credit memos. Reduce the liability and cash when invoices are paid. Consider any early payment discount that reduces the amount of cash owed on an invoice. For a detailed explanation of how to record accounts payable and subsequent payments, refer to a later section in this guide.
3. Verifying Vendor Invoices and Suppliers
During invoice processing, verifying the accuracy of vendor invoices and the validity of suppliers is essential to prevent errors and fraud before approving and paying them. 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 accounts payable management helps businesses accurately track cash requirements, control spending, and maintain reliable financial records.
Common tools for managing AP include:
- Accounts payable aging reports to monitor outstanding invoices and due dates
- Cash flow forecasting to plan upcoming payments
- Payment reconciliation to verify payment accuracy
- AP metrics to monitor efficiency and payment performance
- Spend reporting to improve visibility and identify cost-saving opportunities
The accounts payable subledger should also reconcile with the general ledger to ensure AP balances are complete and accurate.
5. Supplier Relationships
Paying suppliers on time helps maintain strong relationships and avoid late fees or shipment disruptions. Offering efficient electronic payment methods, such as ACH, global ACH, and other supplier-preferred methods, can also reduce manual AP work and payment 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:
- Purchase-order-backed invoices
- Freight/shipping
- Contractor invoices
- Utilities
- Equipment
- Subcontractors
- SaaS subscriptions
Common documents in AP
Common AP documents include:
- Invoices: to record AP purchases
- Purchase orders: from the purchasing department to match approved orders with invoices
- Receiving reports/Goods Receipt Notices (GRNs): to match quantities received with invoices in three-way matching
- Credit memos: to record AP reductions for returns or adjustments
- Vendor statements: sent by vendors, usually monthly, to summarize open (unpaid) invoices and credit memos, with the balance due
Build a more resilient AP function
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How to record accounts payable
Accounts payable is recorded using double-entry accounting. 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:
- Debit the asset or expense account related to the purchase.
- 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:
- Debit the accounts payable account
- Credit the cash account used to make the payment
Reducing Accounts Payable When an Early Payment Discount is Taken
When you earn an early payment discount, such as 2/10, net 30, your company pays less cash and owes a smaller balance on its invoice. The entire accounts payable balance must be reversed with a slightly different entry upon payment of the supplier invoice.
When taking an early payment discount, record the supplier invoice payment instead as:
- Debit the accounts payable account for the entire invoice balance
- Credit the cash account used to make the payment for the discounted amount paid
- 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 software automatically records the accounts payable entry that debits accounts payable and credits cash. Transactions from the accounts payable subledger are posted to the general ledger accounts.
Accounts Payable on the Balance Sheet
Accounts payable appear on the balance sheet under current liabilities, representing short-term, interest-free amounts owed to creditors. AP is generally outstanding for less than 90 days, although some businesses may extend supplier payments to 120 days due to cash flow needs or accounts receivable timing.
Example Accounts Payable Transactions
Company A purchases raw materials inventory from Supplier B on credit for $2,000. 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:
| Debit | Raw materials inventory | $2,000 |
| Credit | Accounts payable | $2,000 |
Upon supplier invoice payment, with no early payment discount taken:
| Debit | Accounts payable | $2,000 |
| Credit | Cash | $2,000 |
Or, upon supplier invoice payment, when taking the early payment discount:
| Debit | Accounts payable | $2,000 |
| Credit | Cash | $1,960 |
| Credit | Early payment discounts | $40 |
What is accounts payable in accounting?
Accounts payable is part of accrual accounting and represents short-term amounts owed to suppliers for goods or services purchased on credit. The AP balance appears under current liabilities on the balance sheet and typically carries a credit balance.
When a supplier invoice is received, the corresponding purchase is recorded as an asset or expense, while accounts payable is credited. When the invoice is paid, accounts payable is debited, and cash is credited.
For the supplier, the same transaction is generally recorded as an asset called accounts receivable.
Accounts Payable as Process and Department
The AP process involves supplier invoice management in these 6 steps:
- Invoice receipt
- Invoice verification and three-way matching
- Invoice approval
- Payment processing
- Payment posting (to the sub-ledger and general ledger)
- Payment reconciliation
Preceding steps in the procure-to-pay process are:
- Purchase requisition
- Purchase order
- Receiving purchased goods
Accounts payable may also refer to the department responsible for processing supplier invoices.
Accounts payable compared to related terms
These tables compare Accounts Payable vs Accounts Receivable, Accounts Payable vs Trade Payables, and Accounts Payable vs Accrued Expenses.
Table 1: AP vs. Accounts Receivable
| Accounts Payable | Accounts Receivable | |
|---|---|---|
| Invoice type | Supplier invoice | Customer invoice |
| Money owed to | Supplier | Your business |
| Balance sheet classification | Current liability | Current asset |
| Account debit or credit balance | Credit balance | Debit balance |
| Offset by contra-account | No | Yes- allowance for doubtful accounts |
| Aging report | Yes | Yes |
The key difference between accounts payable vs. accounts receivable is the direction of the obligation: accounts payable represents money your business owes suppliers, while accounts receivable represents money customers owe your business. Both affect cash flow.
Table 2: AP vs. Trade Payables
| Accounts payable | Trade payables | |
|---|---|---|
| Only inventory-related | No | No—can include goods and services |
| Current liability | Generally, yes | Generally, yes |
| Line item on the balance sheet | Yes, separately or within “trade and other payables” | Usually reported within AP or as “trade and other payables” |
| Aging report | Yes | Yes—included in the AP aging report |
Trade payables are amounts owed to suppliers for goods or services received in the normal course of business. Many companies use “trade payables” and “accounts payable” interchangeably, although some distinguish trade purchases from other supplier obligations. AP does not include every short-term liability; loans, taxes payable, and accrued expenses may be recorded separately.
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
Purchases that go directly into the products a company sells are considered direct spend.
Table 3: AP vs. Accrued Expenses
| Accounts Payable | Accrued Expenses | |
|---|---|---|
| Only expense-related | No, all-inclusive | Yes |
| Current liability | Yes | Yes |
| Line item on the balance sheet | Yes | Often shown as “accrued liabilities” or included in other current liabilities |
| Aging report | Yes | No |
Accounts payable generally records amounts owed for goods or services received when a supplier invoice is received, or the amount is formally agreed. Accrued expenses record costs that have been incurred but not yet invoiced or paid. Examples include accrued payroll, benefits, taxes, and loan interest.
Domestic vs international AP
International accounts payable introduces additional considerations when supplier invoices are denominated in foreign currencies. Businesses may use FX hedging to lock in exchange rates between the invoice and payment dates, helping manage currency fluctuations and improve cash flow predictability.
With accounts payable hedging, cash flow management improves, and spending can be better controlled.
By making cross-border payments to international suppliers in their preferred local currencies and payment methods, your business can improve its supplier relationships.
Global regulatory compliance is another consideration when making cross-border payments. Businesses must comply with sanctions lists, such as OFAC, and meet AML (anti-money laundering) and KYC (Know Your Customer) requirements.
Common challenges in accounts payable and how to solve them
Common challenges in accounts payable include:
- Duplicate payments
- Late payments
- Manual data entry errors
- Fraud exposure
- Lack of visibility
Duplicate Payments
Suppliers and vendors may send their customers multiple copies of an invoice to expedite payment. The purchaser must use a system capable of flagging duplicate invoices to avoid duplicate invoice payments, which would unnecessarily increase cash outflows and inflate assets or expenses.
Solution: AP automation software flags duplicate invoices to prevent paying the same invoice twice.
Late Payments
Businesses without efficient accounts payable processes may not be able to process invoices in time to avoid late payments and related late-payment fees. When accounts payable invoices aren’t paid on time, businesses risk missing shipment cutoffs and damaging their supplier relationships.
Solution: AP automation automates approval routing, reduces invoice approval bottlenecks, and significantly increases efficiency, enabling timely invoice payment.
Manual Data Entry Errors
Traditional standalone ERP systems and accounting software require manual data entry, including recording vendor contact information, invoices, and credit memos, as well as coding accounts payable. The result is increased human error, leading to incorrect payments and accounting inaccuracies.
Solution: AP automation reduces manual invoice processing through end-to-end automation, lowering error rates and increasing efficiency.
Fraud Exposure
Accounts payable is fraud-prone because it offers opportunities for bad actors to profit easily from fraudulent invoices or cyberattacks. The risk is particularly high for international accounts payable because often, payees are unknown.
Solution: Use AP automation to validate suppliers through tax ID numbers (TINs) upon onboarding and efficiently match POs and receiving reports before making payments. Optionally, add behavioral fraud software to enhance fraud detection.
Lack of Visibility
In manual accounts payable systems, visibility is limited, and businesses may experience delays in entering accounts payable data.
Solution: AP automation software enables timely invoice entry and provides real-time visibility through standard reports and, ideally, custom real-time reports generated from AI queries. Multi-entity AP automation software gives stakeholders views of accounts payable and spending by vendor, entity, and the combined company.
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 either the days payable outstanding metric or the accounts payable turnover ratio. Both metrics measure your company’s average AP invoice payment rate.
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 higher DPO means the company takes longer, on average, to pay suppliers.
- A lower DPO means the company pays suppliers more quickly.
- Whether a DPO is healthy depends on factors such as supplier payment terms, industry norms, cash flow, and the company’s working capital strategy.
Accounts Payable Turnover Ratio
The accounts payable turnover ratio measures how frequently a company pays its average accounts payable balance during a given period. A higher ratio generally indicates faster payment, while a lower ratio indicates that the company takes longer to pay suppliers.
The formula for accounts payable turnover 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
The Accounts Payable Invoice Processing Cost metric measures the cost of processing AP invoices, either per invoice or per $1,000 of revenue.
Accounts Payable Invoice Processing Cost is defined by APQC and reported in CFO Magazine’s Metric of the Month (2018 and 2025).
Cost per invoice spreads AP invoice processing costs over the number of supplier invoices. Cost per $1,000 of revenue measures the amount of funds your business spends to process AP invoices relative to its revenue. 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.
Longer invoice processing times may indicate opportunities to:
- Replace manual AP processes with automation
- Simplify approval workflows and remove bottlenecks
- Enable anywhere, anytime invoice approvals
- Replace paper checks and unnecessary wire transfers with more efficient electronic payment methods
Payment Errors
The number of invoice payment errors measures how many times your company pays duplicate invoices, overpays invoices, or pays the wrong supplier. Payment errors unnecessarily cost your business money and extra time resolving differences with suppliers.
Percentage of Discounts Captured
The percentage of discounts captured metric expresses the rate at which your company takes early payment discounts, such as 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.
Check out our AP automation guide for beginners, with three simple steps to get started.
Take control of your accounts payable with automation
The accounting cycle process is highly subject to human error, especially during manual data entry. Paper invoices also cause accounting 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 automate 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: Approval workflows prevent a single employee from controlling the entire payment process.
- Duplicate and fraud prevention: Automated checks flag duplicate invoices, suspicious vendor information, and payment anomalies.
- Vendor validation: Automated systems can validate supplier information, screen against sanctions lists, and verify payment details.
- Audit trails: AP activity and approvals are logged to support compliance, audits, and financial reporting.
With these built-in controls, automation speeds up accounts payable, reduces errors, strengthens governance, and protects company assets.
How Tipalti automates accounts payable
Tipalti AP automation integrates with your ERP or accounting system to automate accounts payable processes from supplier onboarding and invoice processing through payment and reconciliation.
Key capabilities include:
- Vendor and supplier management: The Supplier Hub enables suppliers to enter their own payment and tax information, reducing manual work and errors.
- Automated invoice processing and PO matching: AI-powered invoice capture, coding, approval routing, and two- and three-way matching speeds up invoice processing and strengthen controls.
- Fraud and risk prevention: Tipalti Detect® flags suspicious payees and accounts linked to blocked or suspended payees. Separately, Tipalti’s rules engine uses 26,000 global rules to identify payment issues and reduce errors.
- Global supplier payments: Automate payments across countries, currencies, and payment methods, with built-in regulatory and tax compliance capabilities.
- Payment reconciliation: Automatic syncing with accounting systems reduces reconciliation work and helps accelerate financial close.
- Tipalti AI: Tipalti’s integrated payables intelligence platform helps controllers proactively identify and reduce process risks and errors.
Tipalti can also extend AP into related finance workflows with Procurement, Expense Management, Multi-FX, and FX Hedging.
Tipalti has turned what was once a 40-hour weekly task into just five hours, even as we’ve grown to 17 entities.
Cortney Grubb
Controller,LivTech
By combining automation, AI, and global payment capabilities, Tipalti helps finance teams improve efficiency, control, visibility, and supplier payment operations.
Building a more efficient accounts payable process
Accounts payable is both a key finance function and a current liability representing amounts owed to suppliers. The AP process includes receiving and verifying supplier invoices, obtaining approvals, making payments, and reconciling transactions.
Accounts payable automation can speed up these workflows through automated invoice capture, matching, approvals, payments, supplier management, and reconciliation. The result is greater efficiency, stronger financial controls, improved visibility, and more timely supplier payments.
Explore Tipalti AP Automation to see how you can automate accounts payable from invoice processing through payment and reconciliation.
Accounts payable FAQs
Is accounts payable a debit or a credit?
Accounts payable normally has a credit balance, representing amounts owed for unpaid supplier invoices. Payments and supplier credit memos debit AP, reducing the liability.
A vendor account may show a debit balance instead of a credit balance when your business overpays, pays a duplicate invoice, or applies a payment to the wrong vendor’s account. Accounts payable or accounting staff should correct any errors.
Where do you find a company’s accounts payable?
Accounts payable appears under current liabilities on a company’s balance sheet. Current liabilities generally include obligations expected to be settled within one year or the normal operating cycle. Supplier invoices are typically paid within 30 to 90 days, depending on agreed payment terms.
Is accounts payable a liability or an asset?
Accounts payable is a liability, not an asset. It represents the amounts your business owes suppliers for goods or services received on credit. The liability remains until the invoice is paid or otherwise settled.
What’s the difference between AP and AR?
Although both AP and AR relate to open invoice balances, AP represents the amount payable to vendors/suppliers, whereas AR represents the amount collectible from customers.
What is the accounts payable cycle?
The accounts payable cycle is the set of workflows in the procure-to-pay process related to supplier purchases and payments, from purchase requisition and PO through invoice processing, payment, and reconciliation.
