How Does an Account Payable Arise With a Vendor?

An accounts payable (AP) represents a company’s financial obligation to pay for goods or services it has received on credit from its vendors or suppliers. This short-term debt appears on a company’s balance sheet as a current liability, signifying amounts due typically within 30 to 90 days. Accounts payable are distinct from accounts receivable, which are amounts owed to a company by its customers. This process influences cash flow and vendor relationships.

Initiating the Purchase

The journey of an accounts payable often begins with a formal decision to acquire goods or services, typically documented through a purchase order (PO). A purchase order serves as a commercial document issued by the buyer to the seller, detailing the types, quantities, and agreed-upon prices for products or services required. This document acts as an initial commitment or authorization for the purchase. Once accepted by the vendor, a purchase order becomes a legally binding agreement, obligating the buyer to complete the purchase at the specified terms.

Receiving Goods or Services

Following the issuance of a purchase order, the next step involves the actual receipt of the goods or the rendering of services. At this stage, a company generates a receiving report, which serves as official documentation confirming the delivery. This report verifies that the items have been physically received and often notes their condition upon arrival, along with any discrepancies. The receiving report confirms that the delivery aligns with the initial purchase order, but it does not yet create the formal payable obligation.

Vendor Invoicing

The formal trigger for an accounts payable to arise is the receipt of a vendor invoice. After delivering the goods or completing the services, the vendor issues this document as a formal request for payment. A vendor invoice typically includes essential details such as a unique invoice number, the invoice date, and vendor contact information. It also lists the goods or services provided, their quantities, unit prices, the total amount due, and payment terms. This invoice officially signals the company’s obligation to pay for the received items or services.

Verifying the Obligation

Before an invoice is approved for payment, companies typically undertake an internal verification process to confirm the legitimacy of the vendor’s request. This step often involves a “three-way match,” where the vendor invoice is cross-referenced against the original purchase order and the receiving report. This comparison ensures that the goods or services billed were indeed ordered and received, and that the billed amount matches the agreed-upon price. Completing this three-way match confirms the validity of the transaction and establishes the financial liability.

Recording the Liability

Once the vendor invoice has been thoroughly verified through the matching process, the final step in the accounts payable lifecycle is its formal recognition within the company’s financial records. An accounting entry is made to record the obligation as a liability on the company’s balance sheet. This entry typically involves debiting an expense or asset account, depending on the nature of the purchase, and crediting the accounts payable account. This accounting action formally establishes the debt owed to the vendor.