What Is Accounts Payable: Everything You Need to Know (with Examples)

Introduction

Have you ever considered how much your company’s success depends on paying its bills on time? Behind every product shipped, every service rendered, and every business partnership is a system that quietly ensures smooth financial transactions—accounts payable. But what is accounts payable, and why does it play such a crucial role in your business operations? 

With the accounting software market poised to expand at an impressive 8.5% CAGR by 2027, forward-thinking businesses are automating their AP processes to gain a competitive edge. After all, examples of accounts payable extend far beyond simply settling debts—they encompass opportunities for discounts, better credit ratings, and a more organized financial structure.

In this guide, we will break down the importance of mastering AP, exploring what accounts payable does, why it’s important, and how you can optimize this crucial financial function. 

What Is Accounts Payable? 

Accounts payable (AP) refers to the short-term obligations a business owes to its suppliers for goods or services that have been purchased but not yet paid for. These debts are typically recorded under current liabilities on the company’s balance sheet. 

In essence, when a company buys products or services on credit, the total amount owed to suppliers is tracked through the accounts payable process. This allows businesses to acquire what they need immediately, while deferring payment for a later date, helping to maintain smooth operations without disrupting cash flow.

Is accounts payable more than just an accounting entry?

While the phrase “accounts payable” might conjure up images of invoices and balance sheets, it’s much more than just bookkeeping. An efficient accounts payable department ensures timely payments, prevents fraud, and strengthens relationships with vendors. On a larger scale, a well-managed AP function can influence the organization’s cash flow and even its profitability.

Key Components of Accounts Payable: What’s Included?

To truly grasp what is accounts payable, it’s essential to understand the various components that make up this critical financial function. Let’s break down the main components that play a role in efficient AP management:

1. Vendor invoices

Every business purchases goods or services from suppliers on credit. These vendor invoices form the backbone of accounts payable. Whether it’s office supplies, raw materials, or outsourced services, timely recording and payment of these invoices are crucial to maintaining vendor relationships.

2. Utilities and operating expenses

Utility bills like electricity, water, and internet services also fall under AP. These expenses may seem routine, but missing a payment can have a serious impact on daily operations. A late payment to your internet service provider could mean a day of lost productivity, which is why accounts payable basics include such essentials.

3. Employee reimbursements

From business travel to meals and office supplies, employees often incur expenses on behalf of the company. These reimbursements are recorded in AP and are important for ensuring employee satisfaction and trust.

4. Accruals and bills payable

Accruals refer to expenses that have been incurred but not yet paid. This includes wages, interest, and tax obligations that will eventually need to be settled. Properly managing these through accounts payable ensures your company has a clear picture of its financial liabilities.

Each of these components is vital to understanding what does accounts payable do in the day-to-day functioning of a business. By keeping an accurate record of what is included in accounts payable, finance teams can maintain transparency, make informed spending decisions, and avoid costly mistakes.

The Step-by-Step Process of Accounts Payable: From Invoice to Payment

Let’s dive into the step-by-step breakdown of the accounts payable process and explore the essential elements that keep your business running like clockwork.

1. Invoice capture: The starting point of Accounts Payable

The accounts payable process begins when a company receives an invoice from a vendor. Traditionally, this involves manually entering details like vendor information, line items, and general ledger (GL) coding into the system. While this sounds straightforward, human error often creeps in during manual data entry. 

Studies show that manual AP processes lead to error rates as high as 3.6%, which can result in delayed payments or inaccuracies in financial records. Automation tools, on the other hand, can capture invoices with near-perfect accuracy, drastically reducing the chance of errors.

Common Pitfalls of Manual Invoice Capture:

• Inaccurate data entry leading to discrepancies in financial statements

• Loss of time and resources due to repetitive manual tasks

• Increased risk of missed deadlines and late payment penalties

2. Invoice approval: Securing authorization before payment

Next comes invoice approval, a crucial step where the invoice must be verified and approved by the relevant departments. In a traditional setup, this may involve physically walking the invoice around the office to gather signatures, which, while effective, is time-consuming and prone to delays. Imagine a busy finance team in a global company—this slow-moving process could easily result in late payments and missed opportunities, like discounts for early payment.

What is included in accounts payable here is not just the monetary amount but also ensuring that the payment is legitimate, accurate, and approved by the right stakeholders. Leveraging AP automation software speeds up the approval process by routing digital invoices for instant review and approval, drastically reducing wait times.

3. Payment authorization: Confirming the payment terms

Once the invoice is approved, the next step is to authorize payment. This step involves determining when and how payment will be made, whether by check, ACH transfer, or credit card. Here, businesses can take advantage of early payment discounts. 

According to industry reports, companies lose out on 2-3% of their potential cost savings because they are unable to pay suppliers early, simply due to inefficient AP processes. By adopting a streamlined approach to what accounts payable do, businesses can reduce their costs while maintaining strong vendor relationships.

Payment Methods	Usage & Advantages
Cheque	Traditional but time-consuming, prone to fraud
ACH Transfer	Quick, secure, and preferred by most vendors
Credit Card	Useful for leveraging rewards, but may involve fees

4. Payment Execution: The final step

Finally, after the payment has been authorized, the payment is processed, and the vendor receives their funds. This step often involves issuing checks, processing ACH payments, or executing credit card transactions. Once the payment is completed, accounts payable records the payment, closes the invoice, and stores it for future auditing or review.

It’s important to note that this process is repeated thousands of times in large organizations, making accounts payable basics a key component in maintaining smooth operations. But why stop at just completing payments? 

Businesses can analyze payment data to find patterns, identify areas for cost savings, and even prevent fraud. Fraud in AP processes is a growing concern, with over 81% of organizations reporting some form of payment fraud in 2023. Having a robust, automated accounts payable system reduces up the risk significantly.

Real-World Examples of Accounts Payable: Practical Insights

Seeing examples of accounts payable in action helps illustrate the essential role this department plays in a business’s operations. From paying suppliers for goods to covering service costs, AP is integral to ensuring everything runs smoothly. Here are some real-world examples that reflect the variety of expenses managed by accounts payable:

1. Transportation and logistics cost

Any business that deals with physical goods will have transportation expenses. Whether shipping products to customers or receiving raw materials, transportation costs form a significant part of what is included in accounts payable. Paying logistics companies on time ensures smooth delivery and helps avoid supply chain disruptions.

2. Raw materials and supplies

For manufacturers, this is one of the most common categories in AP. Think about a car manufacturer: they rely on raw materials like steel and automotive parts. Timely payment of these invoices is crucial to avoid production delays.

3. Outsourced services

Many businesses rely on external partners for services such as marketing, IT support, or legal consultations. These contracted services are recorded in accounts payable and require prompt payment to maintain productive working relationships.

4. Software subscriptions and licenses

With the rise of digital tools, most companies now depend on software as a service (SaaS) to operate efficiently. Paying for these software licenses and subscriptions falls under AP, and failing to do so could mean losing access to critical business tools.

Accounts Payable Vs Accounts Receivable: Understanding the Difference

Aspect	Accounts Payable (AP)	Accounts Receivable (AR)
Definition	Money the business owes to its suppliers/vendors	Money customers owe to the business
Balance Sheet Category	Liability	Asset
Impact on Cash Flow	Outflow of cash when payments are made	Inflow of cash when payments are received
Goal	Pay suppliers on time while managing cash flow	Collect payments promptly to maintain liquidity
Examples	Vendor invoices, utilities, raw materials	Customer invoices for products or services

When managing business finances, accounts payable (AP) and accounts receivable (AR) are two sides of the same coin, yet they play distinctly different roles in the financial ecosystem. Simply put, accounts payable represents the money a business owes to its suppliers or vendors, while accounts receivable refers to the money that customers owe to the business. 

At its core, accounts payable represents the short-term liabilities a company must pay to its vendors for goods or services purchased on credit. These liabilities appear on the balance sheet under current liabilities, as they typically need to be settled within a year. Effective accounts payable management ensures that the company pays its obligations on time, avoids late fees, and takes advantage of early payment discounts. 

On the other hand, accounts receivable is considered an asset because it represents the money that customers owe to the business for products or services they have already received but have not yet paid for. AR appears on the balance sheet as an asset, as it is expected to convert into cash within the company’s operating cycle, typically within a year. 

Accounts Payable Vs Trade Payables: Understanding the Key Differences

Accounts Payable	Trade Payables
Encompasses all short-term liabilities owed by the company	Only includes debts related to inventory or direct operational expenses
Covers a wide range of expenses, from utilities to consulting fees	Specific to the purchase of goods needed for the business operations, like raw materials
Examples: Rent, utilities, or outsourced services	Examples: Raw materials, inventory supplies, or stock for retailers

In simple terms, accounts payable encompasses all of a company’s short-term debts or liabilities, while trade payables specifically refer to money owed for inventory-related goods or services. For instance, a manufacturer may have trade payables for the raw materials used in production, but if they also owe money to an IT service provider for monthly maintenance, that obligation falls under the broader category of accounts payable.

Role of Accounts Payables

At its core, accounts payable serves as the financial backbone of any business, linking the receipt of goods or services to the payment process. This function goes beyond simply recording debts—it ensures that businesses can effectively manage their short-term liabilities and maintain strong relationships with vendors. From ensuring timely payments to maintaining liquidity, what does accounts payable do in a broader sense? It plays a critical role in ensuring operational continuity, preventing unnecessary costs, and safeguarding a company’s financial reputation.

Why accounts payable is important: a strategic view

Imagine your accounts payable system as the lifeline that keeps your business operational. Efficient management of accounts payable basics is essential for accurate financial reporting, cash flow management, and strategic decision-making. A well-functioning AP process helps maintain liquidity, optimizes working capital, and prevents costly penalties from late payments. 

Key responsibilities: What does accounts payable do?

The day-to-day responsibilities of an accounts payable team vary depending on the business structure, industry, and size, but several key tasks are common across all sectors. Some major duties include:

1. Data entry and record-keeping

Entering data into the general ledger and ensuring that all transactions are properly recorded.

2. Invoice review and matching

Ensuring that invoices are accurately matched with purchase orders and receiving documents.

3. Reconciliation

Conducting bank account and credit card reconciliation to ensure that financial records are accurate and up to date.

4. Approval processes

Securing authorization for payments from relevant managers or departments.

5. Assistance with financial reporting

Assisting senior financial officers with preparing reports and conducting audits.

These responsibilities are fundamental to a business’s financial health. Without a diligent accounts payable team, businesses risk mismanaging funds, losing vendor trust, and ultimately, disrupting their supply chain.

Job Roles and Responsibilities in Accounts Payable: From Clerks to Specialists

To handle such a critical financial function, companies employ a wide range of professionals with varying expertise. Some common job titles in accounts payable include:

• Accounts Payable Specialist

• Billing Specialist

• AP Clerk

• AP Coordinator

• Accounts Payable Accountant

These roles might have different focuses depending on the size and complexity of the business. For example, an Accounts Payable Specialist at a large corporation might oversee a team or use advanced software to automate tasks, while a smaller company’s AP Clerk may handle everything from invoice processing to payment scheduling.

The Bigger Picture: How Accounts Payable Affects Financial Strategy

It’s easy to think of accounts payable as merely an operational function, but in reality, it’s much more strategic. Efficient accounts payable management can help businesses negotiate better terms with suppliers, improve cash flow forecasting, and even unlock early payment discounts. For instance, companies can reduce their operational costs by 1-2% annually through early payment discounts. This demonstrates why accounts payable is important for both short-term financial management and long-term profitability.

Examples of accounts payable in action

Let’s consider two examples:

• A Retailer’s Inventory Purchase: When a retailer orders clothing from a supplier, the invoice for that stock forms part of the company’s trade payables, a subset of accounts payable. Timely payment ensures that the retailer continues to receive inventory on time, keeping the business operational.
• Office Utilities: A business that pays for monthly office rent, electricity, and internet bills classifies these as part of accounts payable. Efficient payment of these recurring bills is crucial to ensuring daily operations continue without disruption.

Each example underscores the wide variety of financial obligations that fall under accounts payable, all of which must be handled meticulously.

The Benefits of Efficient Accounts Payable Management

Efficient accounts payable (AP) management is about much more than just ensuring bills are paid on time. It’s a powerful strategic tool that can positively impact your company’s financial health, boost operational efficiency, and strengthen vendor relationships. But what are the tangible benefits of optimizing your AP processes? Let’s dive into why accounts payable is important and how it can transform your business operations.

1. Improved vendor relationships: The power of timely payments

When you make timely and accurate payments, it strengthens the trust and reliability between your business and its suppliers. This trust can lead to better pricing, more flexible payment terms, and even priority in stock allocation during high-demand periods. Think of it this way: in any business, having a solid vendor relationship is like having a VIP pass—you gain access to more favorable terms that can enhance your profitability.

Here’s an interesting statistic: 89% of businesses that prioritize efficient accounts payable management report improved relationships with suppliers, resulting in a 10-15% reduction in their overall procurement costs. Whether it’s raw materials for manufacturing or office supplies, what is included in accounts payable can directly impact your bottom line through strong vendor partnerships.

2. Enhanced cash flow management: Keeping your liquidity in check

One of the most critical functions of what accounts payable do is to help manage your business’s cash flow. By effectively scheduling payments and utilizing the full length of payment terms, companies can ensure they have enough cash on hand for day-to-day operations and unexpected opportunities. Having the right accounts payable basics in place ensures you never find yourself strapped for cash or missing out on an investment opportunity because of poor cash flow management.

In fact, companies with optimized AP processes typically see a 20% improvement in working capital. This enhanced cash flow management ensures that businesses can navigate both lean times and growth phases with confidence, maintaining the liquidity needed to meet operational and investment needs.

3. Cost savings and access to discounts: Turn your AP process into a profit center

Did you know that many suppliers offer significant discounts for early payments? It’s true—up to 2% on the invoice total for payments made within 10 days. While that might not seem like much at first, consider the volume of payments made over a year. Efficient accounts payable management ensures that businesses take advantage of these early payment discounts, translating into substantial savings on the cost of goods and services.

Moreover, avoiding late payment fees not only keeps your finances in order but also contributes to your company’s reputation in the business community. Examples of accounts payable such as supplier invoices, utility bills, and service contracts can become sources of savings when managed effectively.

Benefit	Impact
Early Payment Discounts	Cost savings of 1-2% per invoice
Avoiding Late Fees	Preservation of financial reputation and avoidance of penalties
Cash Flow Flexibility	Ability to align payment schedules with revenue

4. Fraud prevention and compliance: Safeguarding your business

A well-organized accounts payable process isn’t just about paying bills; it’s also your first line of defense against fraud and non-compliance. In today’s digital age, AP fraud is becoming increasingly common, with businesses losing billions annually due to fraudulent transactions. Efficient AP processes that include automated systems can help safeguard your business by enforcing strict controls, audit trails, and approval workflows.

A recent survey found that businesses using automated AP systems reported 60% fewer fraud incidents compared to those relying on manual processes. This underscores why accounts payable is important for maintaining financial security and compliance with regulatory standards. In addition, proper AP management helps ensure adherence to internal policies and industry regulations, reducing the risk of costly fines or audits.

5. Strategic financial insights: Data that drives growth

Perhaps one of the most overlooked benefits of efficient AP management is the valuable financial insights it provides. With a streamlined accounts payable process, companies can analyze spending patterns, identify cost-saving opportunities, and negotiate better terms with suppliers. This data can inform strategic decision-making, improve budgeting accuracy, and ultimately drive business growth.

For example, by reviewing what is included in accounts payable, a business might discover that a large portion of their budget is spent on third-party services, prompting them to negotiate lower rates or find alternative suppliers. This data-driven approach is key to optimizing costs and improving profitability.

What Are the Challenges in Accounts Payable?

Despite its critical role, managing accounts payable presents unique challenges that can slow down operations and affect a company’s financial health. The complexities of ensuring timely payments, maintaining accuracy, and keeping up with regulations can turn accounts payable into a time-consuming process if not managed well. Here are the most common challenges businesses face:

1. Manual processes and data entry errors

Many companies still rely on manual systems for processing invoices. This often involves tedious data entry, which is prone to human error. Imagine entering thousands of invoices by hand—errors are inevitable. These inaccuracies can lead to payment delays, which damage vendor relationships and complicate what is included in accounts payable reporting.

2. Late payments and missed deadlines

One of the key functions of what accounts payable do is ensuring that vendors are paid on time. However, tracking deadlines across numerous invoices is a challenge, especially when payments are handled manually. Missed deadlines lead to late fees, strained vendor relationships, and potential cash flow issues.

3. Dealing with discrepancies

Invoices often do not match purchase orders or the received goods, leading to disputes with suppliers. These discrepancies cause delays in payments and require significant time and effort to resolve. Efficient accounts payable basics include having clear processes to address discrepancies, but this can be difficult without automation tools in place.

4. Regulatory Compliance

As regulations around financial reporting, taxes, and supplier management evolve, accounts payable teams must stay updated to ensure compliance. Failure to comply can result in hefty fines and damage to a company’s reputation. Managing this manually can be daunting and prone to oversight, especially in industries with strict regulatory requirements.

Best Practices for Accounts Payable

Turning accounts payable from a pain point into a streamlined, efficient process requires adopting best practices that address these challenges. By implementing these strategies, businesses can transform AP into a strategic asset that boosts financial health and operational efficiency. Here are some key best practices:

Adopt electronic payments

Switch to digital payments to reduce costs, improve security, and streamline processes.

Standardize AP workflows

Centralize and automate workflows to eliminate redundancy and enhance efficiency.

Strengthen vendor relationships

Timely, accurate payments foster positive supplier relationships, improving deals and performance.

Leverage early payment discounts

Prioritize early payments to secure discounts and save money.

Track key AP metrics

Monitor important KPIs like processing time, error rates, and cost per invoice to optimize operations.

Automate AP processes

Fully automate to reduce manual work, save time, and minimize errors.

Regular reporting

Run regular reports to identify trends, prevent fraud, and improve cash flow management.

Avoid duplicate payments

Use automation to catch and prevent costly duplicate payments before they occur.

Take a strategic approach

View AP as a value center by optimizing processes and utilizing data to improve performance.

Enhance vendor transparency

Provide real-time payment updates to vendors through automated systems, reducing inquiries.

Support hybrid work

Automate processes to ensure efficient payment handling in remote or hybrid work settings.

Automate invoice capture

Utilize OCR and automation to accurately capture and process invoice data quickly.

Go paperless

Eliminate paper, streamline workflows, and enhance efficiency by fully transitioning to digital.

The Benefits of Efficient Accounts Payable Management

Efficient accounts payable (AP) management is about much more than just ensuring bills are paid on time. It’s a powerful strategic tool that can positively impact your company’s financial health, boost operational efficiency, and strengthen vendor relationships. But what are the tangible benefits of optimizing your AP processes? Let’s dive into why accounts payable is important and how it can transform your business operations.

1. Stronger vendor relationships

Timely payments build trust with suppliers, leading to better deals and priority service, ultimately reducing procurement costs by 10-15%.

2. Better cash flow management

Efficient payment scheduling boosts liquidity, giving you the flexibility to seize opportunities and improve working capital by 20%.

3. Cost savings and discounts

Early payments can unlock supplier discounts, saving up to 2% per invoice and avoiding costly late fees, turning AP into a profit source.

Benefit	Impact
Early Payment Discounts	Cost savings of 1-2% per invoice
Avoiding Late Fees	Preservation of financial reputation and avoidance of penalties
Cash Flow Flexibility	Ability to align payment schedules with revenue

4. Fraud prevention and compliance

Automated AP systems cut fraud by 60%, ensuring compliance and safeguarding your business with strong controls and audit trails.

5. Strategic financial insights

AP data reveals spending trends, helping negotiate better deals and drive growth through smarter, cost-saving decisions.

What Is the Future of Accounts Payable?

The future of accounts payable is set to be driven by technological advancements and strategic innovation. As more businesses recognize why accounts payable is important to overall financial health, they are investing in systems and tools that elevate AP from a back-office task to a strategic, data-driven process. Here’s what’s on the horizon:

1. AI and machine learning integration

While automation has already transformed the AP landscape, the integration of AI and machine learning is poised to take it a step further. AI can not only automate invoice processing but also predict spending patterns, identify anomalies, and assist with decision-making, all of which will improve efficiency and reduce the risk of fraud.

2. Blockchain for secure payments

Blockchain technology could revolutionize how payments are processed. With its ability to create an immutable, transparent ledger, blockchain can enhance trust between suppliers and businesses, prevent fraud, and ensure payments are verified and executed automatically through smart contracts.

3. Data-driven decision making

Future accounts payable basics will include more advanced data analytics. With deeper insights into spending patterns and vendor performance, businesses can make more informed strategic decisions, such as negotiating better terms or identifying opportunities for cost savings.

4. Vendor portals for enhanced collaboration

Vendor portals are set to become a standard tool, allowing suppliers and businesses to collaborate more efficiently. These platforms provide real-time updates on payment status, document exchange, and allow both parties to resolve discrepancies more quickly. This shift will enhance trust and transparency in business relationships.

5. Sustainability in AP

As businesses grow more conscious of sustainability, accounts payable will increasingly focus on reducing paper use and adopting eco-friendly practices. Going digital with invoices and payments not only streamlines the AP process but also aligns with corporate social responsibility goals.

FAQs on Accounts Payable

1. Where can I find a company’s accounts payable?

You can find a company’s accounts payable on its balance sheet, typically listed under “current liabilities.” Accounts payable represent the short-term debts or obligations a company owes to its suppliers or vendors for goods or services that have been received but not yet paid for.

2. Are accounts payable business expenses?

No, accounts payable are not directly considered business expenses. They represent the money a company owes to vendors for goods or services already received. Business expenses are recorded in the income statement, while accounts payable is a liability recorded on the balance sheet. 

3. Are accounts payable credit or debit?

Accounts payable are recorded as a credit on the balance sheet because it represents a liability. When a company receives an invoice, it credits accounts payable and debits an expense account or an asset, depending on what was purchased. This is a basic concept in understanding what accounts payable does in financial accounting.

4. Is accounts payable a current liability?

Yes, accounts payable is considered a current liability. It represents short-term obligations that are typically due within a year. Paying off accounts payable helps manage cash flow effectively, which is why accounts payable is important for maintaining a company’s financial health.

5. Who manages accounts payable?

The accounts payable department or team manages accounts payable. They handle tasks such as processing invoices, verifying transactions, and making payments to suppliers. This team ensures that all unpaid bills are processed and paid on time, which is a core function of what accounts payable does.

6. What is the relationship between accounts payable and cash flow?

Accounts payable directly affects cash flow because it involves money that a company will need to pay out in the near future. Efficient management of accounts payable helps improve cash flow by delaying payments until they are due while taking advantage of any early payment discounts.