What Is Accounts Payable? Definition and Process

Accounts payable (AP) are the short-term obligations a company has to its suppliers and vendors. Businesses of all sizes use AP to acquire necessary goods and services on credit. Understanding AP is important for managing cash flow and vendor relationships. AP supports operations by deferring immediate cash outflows.

What Accounts Payable Is

Accounts payable (AP) refers to the money a company owes to its suppliers or creditors for goods and services received but not yet paid for. These are short-term liabilities, typically due within 30 to 90 days, often under terms like “Net 30.” This financial obligation arises when a business purchases items like raw materials, office supplies, or services on credit.

AP is classified as a current liability on a company’s balance sheet, distinguishing it from longer-term debts. It represents a future outflow of cash. Managing AP allows a company to conserve cash temporarily.

When a company incurs a new payable, the accounts payable balance increases. Conversely, when a payment is made to a supplier, the accounts payable balance decreases. This interaction reflects a company’s short-term financial obligations and liquidity.

The Accounts Payable Workflow

The accounts payable workflow begins when a company receives an invoice from a vendor. The initial step involves accurately capturing the invoice data, which can be done manually or through automated systems.

A key step is “three-way matching,” which compares three documents: the purchase order (PO), the receiving report, and the vendor invoice. The purchase order details what was ordered, the receiving report confirms receipt, and the invoice is the vendor’s bill.

If these documents align, the invoice proceeds to approval. This approval involves verifying the expenditure’s legitimacy and alignment with company policies. Invoices are routed to appropriate approvers based on factors like department or expense thresholds. Any discrepancies found during the matching or approval stages trigger a review or dispute resolution process with the supplier before payment can be authorized.

Once an invoice is approved, it is recorded in the company’s accounting system as an account payable. Payment is then scheduled according to the agreed-upon terms, such as Net 30 or Net 60. Payments can be made through various methods, including electronic funds transfers or checks. After payment is issued, the accounting records are updated to reflect the fulfilled obligation, reducing the accounts payable balance. This process helps ensure timely payments, maintain vendor relationships, and provide a clear audit trail for all transactions.

Accounts Payable on Financial Statements

Accounts payable appears on a company’s financial statements, primarily on the balance sheet. It is listed as a current liability, signifying that these obligations are due to be settled within one year. This classification is distinct from long-term liabilities, which are debts due beyond a 12-month period.

The presence and movement of accounts payable provide insights into a company’s short-term financial health and operational efficiency. On the balance sheet, accounts payable contributes to the calculation of a company’s working capital. Working capital (current assets minus current liabilities) indicates resources for daily operations.

An increase in accounts payable, while an increase in liabilities, means the company has deferred cash outflow, allowing the company to retain cash longer. Conversely, a decrease indicates that the company is paying off its debts, which reduces cash on hand.

Accounts payable also impacts the cash flow statement, specifically within the operating activities section. When accounts payable increases, it is seen as a positive influence on cash flow from operations because cash has not yet left the business. This occurs because the company has received goods or services without an immediate cash expenditure. Conversely, a decrease in accounts payable reflects cash being used to pay down these obligations, resulting in a negative impact on cash flow from operating activities. Managing accounts payable effectively is important for optimizing cash flow and maintaining liquidity.