What Is Accounts Payable? The AP Process and Its Role

Accounts payable (AP) represents the money a business owes to its suppliers or vendors for goods or services purchased on credit. This financial obligation arises when a company receives products or services but agrees to pay for them at a later date, typically within 30 to 90 days. AP allows for the acquisition of necessary resources without immediate cash outlay. Managing these short-term debts is important for financial health and operational continuity.

What Accounts Payable Represents

Accounts payable is recorded as a current liability on a company’s balance sheet, signifying short-term financial obligations due within one year. This classification distinguishes AP from long-term liabilities, which mature beyond a year. Businesses utilize accounts payable to manage their cash flow, enabling them to use available cash for other immediate needs or investments before payments are due.

By obtaining goods and services on credit, companies can maintain sufficient working capital, which is the difference between current assets and current liabilities. This practice also helps establish and strengthen credit relationships with suppliers, potentially leading to more favorable terms in the future. While increasing accounts payable can indicate a business is leveraging vendor credit, a sustained increase might signal potential cash flow challenges if payments are delayed due to a lack of available funds.

Documents in Accounts Payable

Accounts payable transactions involve several documents that verify payment legitimacy and accuracy. The process often begins with a purchase order (PO), a document generated by the buyer detailing the goods or services requested, including quantities, prices, and terms. The PO acts as an initial agreement and authorization for the purchase.

Upon delivery, a receiving report or packing slip is created. This document confirms items were received, noting quantity and condition. Finally, the vendor issues an invoice, which is a formal request for payment that typically references the purchase order and outlines the total amount due, payment terms, and a unique invoice number. These documents collectively validate a transaction before payment.

The Accounts Payable Workflow

The accounts payable workflow outlines the systematic steps a business follows to process and pay invoices efficiently. It begins with the receipt of a vendor invoice, which can arrive electronically or in paper format. Once received, the invoice undergoes verification for accuracy and completeness.

Matching the invoice against other relevant documents is a key step, known as 2-way or 3-way matching. Two-way matching compares the invoice with the purchase order, while three-way matching adds the receiving report to verify that the goods or services billed were ordered and received. Any discrepancies must be resolved before proceeding. After successful matching and verification, the invoice is routed for internal approval, often based on a company’s spending limits and policies. Once approved, the payment is scheduled and processed according to the agreed-upon terms, such as Net 30 or Net 60, ensuring timely settlement.

Accounts Payable on Financial Statements

Accounts payable is presented on a company’s balance sheet under current liabilities, reflecting its nature as a short-term financial obligation expected to settle within one year. The total balance of accounts payable represents the sum of all outstanding invoices owed to suppliers.

Changes in the accounts payable balance directly influence a company’s cash flow, as reflected in the cash flow statement. An increase in accounts payable can boost cash flow because the company receives goods or services without immediately disbursing cash. Conversely, a decrease in accounts payable indicates the company uses cash to pay down obligations, which reduces available cash. Accounts payable is also linked to the general ledger, where individual transactions are recorded and summarized to form the balance sheet figures.