What is accounts payable? (Definition and examples)

As a business owner or accountant, tracking what your company owes is just as important as tracking what it earns.

That’s where Accounts Payable (AP) comes in.

Whether you’re managing invoices, ensuring timely payments, or optimizing cash flow, understanding accounts payable is key to maintaining good relationships with suppliers and keeping your business financially healthy.

This guide will explain what accounts payable means, how it works, and how to manage it effectively.

Here’s what we’ll cover:

Accounts payable definition

At its core, accounts payable refers to the money your business owes to suppliers, vendors, or creditors in exchange for goods or services.

These debts are typically short-term liabilities, meaning they must be paid within a set period—often 30, 60, or 90 days.

An AP system lets your accounting team avoid frequent payments for each transaction.

Instead, suppliers will enable you to buy on credit, making it easier to manage cash flow and operational expenses.

The term accounts payable can also refer to the department within your company responsible for processing invoices and paying creditors.

What does accounts payable mean for an accounting department?

For an accounting team, accounts payable is more than just a list of unpaid invoices.

Here’s why AP management matters:

Tracking company liabilities

Every unpaid supplier invoice is recorded as a current liability on your balance sheet, ensuring accurate financial reporting.

Managing cash flow

A well-organized AP process helps your business balance payments and cash reserves, so you can cover expenses without financial strain.

Avoiding late fees and penalties

Paying suppliers on time not only prevents extra costs but also builds trust and strengthens business relationship.

Accounts payable versus bills payable

While accounts payable and pills payable may sound similar, they refer to different financial obligations.

• Accounts payable refers to a broader term. It includes all short-term obligations your business owes after purchasing goods or services on credit. It’s recorded as a current liability on your balance sheet and represents the total amount due to suppliers.
• Bills payable, on the other hand, are the specific documents—like invoices or bills—that represent these individual obligations. Each bill payable is a short-term financial obligation and forms part of your overall accounts payable balance. These must be settled within the agreed timeframe.

Accounts payable examples

Understanding accounts payable is easier when you see it in action.

Here are some common scenarios where your business might use AP:

1. Buying office supplies on credit

Imagine your business orders office supplies from a vendor with a 30-day payment term.

Instead of paying upfront, you log the invoice as accounts payable and settle it by the due date.

2. Purchasing inventory for resale

If you run a retail business, you might buy inventory from a supplier on a 60-day payment term.

Instead of paying upfront, the invoice stays in accounts payable until the due date.

This way, you can stock your shelves and keep sales going without immediately dipping into your cash reserves.

3. Hiring a cleaning service

Your company hires a cleaning service that invoices at the end of the month.

Until the payment is processed, the amount is recorded as accounts payable, reflecting the short-term liability on your balance sheet.

These examples show how AP helps manage short-term debts efficiently, allowing your business to maintain operations while controlling cash flow.

How to record accounts payable

Managing accounts payable properly helps keep your business financially stable and your suppliers happy.

Here are the simple steps to record AP in your accounts payable process:

1. Receive the invoice

Your supplier sends an invoice after delivering goods or services.

2. Verify the invoice:

Your accounting team checks that the invoice matches the purchase order and delivery receipt to ensure accuracy.

3. Record the payable:

The invoice amount is logged as a liability in your general ledger, reflecting what your business owes.

4. Schedule the payment

A payment date is set based on agreed terms to avoid late fees and maintain healthy cash flow.

5. Process the payment

Once the invoice is paid, it’s marked as settled, and the liability is removed from your books.

A clear and structured AP process keeps your business organized, prevents errors like duplicate payments, and strengthens vendor relationships.

Using accounts payable software can simplify the process even further by automating invoice matching, tracking due dates, and ensuring accurate record-keeping—helping you stay on top of payments with less manual effort.

What is the relationship between cash flow and accounts payable?

Accounts payable plays a significant role in managing your business’s cash flow.

Delaying payments within agreed terms allows you to keep cash available for other expenses like payroll, rent, or inventory purchases.

This flexibility helps you balance outgoing payments with incoming revenue and avoid unnecessary cash shortages.

But be careful—missing payment deadlines can damage your relationships with suppliers, lead to late fees, and even impact your ability to negotiate better terms in the future.

One way to stay on top of this is by tracking your AP turnover ratio—a metric that shows how quickly your business pays its suppliers.

A high ratio means settling debts quickly, while a lower ratio might indicate potential cash flow challenges.

Accounts payable in accounting

Accounts payable is key to your business’s financial reporting and cash flow management.

Keeping track of AP lets your business stay on top of its obligations while making wise financial decisions.

Here are a few critical AP concepts to know:

Cash flow management

Staying on top of AP ensures your business has enough cash to cover expenses without liquidity issues.

Early payment discounts

some suppliers offer discounts for paying early, which can help cut costs and improve supplier relationships.

AP turnover ratio

this metric shows how quickly your business pays suppliers.

A higher ratio means settling debts fast, while a lower one might signal cash flow challenges.

Features to look for in accounts payable software

Looking to streamline your AP process and cut down on manual work?

The right accounts payable software can automate invoice processing, reduce errors, and help you stay compliant.

Here are some key features to look for:

Invoice capturing

Automatically captures and processes invoice details, so you don’t have to enter them manually.

Approval workflows

Simplifies invoice approvals by routing them to the right people, ensuring nothing gets stuck in the pipeline.

Automated payment scheduling

This feature helps you pay suppliers on time, avoid late fees, and take advantage of early payment discounts.

Auto-matching with AI

Uses artificial intelligence to automatically match invoices to purchase orders and create draft transactions.

This speeds up reconciliation, supports easy daily soft-closing, and removes the need for manual matching or document hunting.

Payment flexibility

Gives you the option to issue payments using each vendor’s preferred method, including checks, ACH, or virtual cards, making the payment process more convenient for everyone.

Integration with accounting software

Syncs seamlessly with your financial records for better tracking and reporting.

Fraud detection and security

Keep your business safe by flagging duplicate invoices, suspicious transactions and preventing unauthorized payments.

Final thoughts

Whether you’re a small business owner or an accountant, handling AP efficiently can make a big difference in your company’s financial health.

With the right processes and tools, you can automate payments, set deadline reminders, and improve overall financial management.

Looking for the best AP solution?

Discover Sage accounts payable software and find the perfect fit for your business.

Accounts payable FAQs

1. What financial statement is accounts payable on?

Accounts payable are listed under current liabilities on the balance sheet since they represent money your business owes to suppliers.

2. Does accounts payable go on the income statement?

No, AP does not appear on the income statement because it’s a liability, not an expense.

Expenses are recorded when incurred, while AP tracks what your business still needs to pay.

3. What’s the difference between accounts payable and accounts receivable?

Both accounts payable and accounts receivable track money moving in and out of your business, but they represent opposite sides of a transaction:

• Accounts payable: the money your business owes to suppliers for goods or services received on credit. It’s recorded as a liability on your balance sheet until paid.
• Accounts receivable: the money customers owe your business for products or services you’ve provided. It’s recorded as an asset since it represents incoming cash.

4. Is accounts payable a credit or debit?

• When recorded, AP is a credit entry (increasing liabilities).
• When paid, it’s a debit entry (reducing liabilities).

5. Is accounts payable an asset or a liability?

Accounts payable are a current liability because they reflect outstanding payments that your business must settle within a short period.