What Is an AP Payment and How Does the Process Work?

An AP payment fulfills a financial obligation a business owes to its suppliers or vendors for goods or services received on credit. Effectively managing these payments is fundamental to a business’s financial operations, contributing to sound cash flow and vendor relationships.

Understanding Accounts Payable

Accounts payable (AP) refers to the money a business owes to its suppliers or vendors for goods and services acquired on credit. This short-term debt is typically due within 30, 60, or 90 days and is recorded as a current liability on a company’s balance sheet. AP allows businesses to obtain resources without immediate cash outflow.

A vendor or supplier is any individual or entity providing goods or services to a business, such as raw materials or consulting work. When a vendor provides goods or services on credit, they issue an invoice. This detailed bill requests payment and outlines the items, quantities, prices, and payment terms.

A purchase order (PO) is a document created by the buying company to formally request goods or services from a vendor. It specifies the type, quantity, and agreed price of the items. A PO serves as an internal record and a commitment to purchase, preceding the vendor’s invoice.

The Accounts Payable Payment Process

The accounts payable payment process begins when a business receives an invoice from a vendor. This invoice might arrive via mail, email, or electronic data interchange. The accounts payable department registers the invoice into the company’s accounting system.

Invoice verification confirms the invoice’s accuracy and compliance. This typically includes a “three-way match,” comparing invoice details against the purchase order and a goods receipt note. This matching ensures what was ordered, received, and billed all align, preventing errors or duplicate payments.

Once verified, authorized personnel review and approve the invoice for payment. This approval confirms the expense is legitimate and aligns with company policies. After approval, the invoice is recorded as a liability, and payment is scheduled according to agreed-upon terms, such as Net 30, 60, or 90 days. The payment is then executed, and records are updated to reflect the disbursement, reducing the company’s liability.

Methods for AP Payments

Businesses utilize various methods to disburse accounts payable payments. Paper checks remain a common method, providing a tangible record. Companies issue business checks from their bank accounts. The recipient deposits the check, which clears through the banking system, typically taking a few business days for funds to transfer.

Electronic payment methods are increasingly prevalent due to their speed and efficiency. Automated Clearing House (ACH) transfers are a widely used option, facilitating direct bank-to-bank transfers. ACH payments are cost-effective and secure, with funds typically landing in the vendor’s account within a few days. Wire transfers offer a faster, often same-day, electronic payment option for urgent or large-value transactions, though they usually incur higher fees than ACH.

Corporate credit cards and virtual cards also serve as payment methods. Corporate credit cards offer benefits like cash back or reward points and assist with cash flow management. Virtual cards are single-use digital numbers generated for specific amounts, enhancing security. These electronic options streamline the payment process and reduce manual handling of checks.