Who Is Accounts Payable and What Do They Do?

Accounts payable (AP) represents a company’s short-term financial obligations to suppliers and vendors for goods and services purchased on credit. It is a fundamental aspect of business finance, ensuring a company can acquire necessary resources while managing outgoing cash flow. Effectively managing accounts payable is important for maintaining strong vendor relationships and overall financial stability.

Understanding Accounts Payable

Accounts payable refers to amounts a company owes to its suppliers for purchases made on credit. These obligations are typically due within 30 to 90 days, usually within a year. Accounts payable is recorded on a company’s balance sheet as a current liability, reflecting money to be paid out soon.

While accounts payable represents money owed by the company, accounts receivable is the opposite: money owed to the company by its customers for goods or services provided on credit. Accounts receivable is classified as a current asset on the balance sheet, as it represents future cash inflows. This distinction helps understand a company’s overall financial health and liquidity.

Functions of Accounts Payable

The accounts payable department within a business is responsible for managing a company’s financial obligations to its suppliers. This involves several distinct activities aimed at ensuring accurate and timely payments. Effective management of these functions helps maintain strong vendor relationships and supports financial operations.

Invoice processing is a primary responsibility, including receiving, verifying, and preparing vendor invoices for payment. This ensures payment only for goods and services actually received and agreed upon. After invoices are processed, payment management involves scheduling and executing payments to vendors according to established terms, helping avoid late fees and secure early payment discounts.

Maintaining strong vendor relations is another function, as consistent and accurate payments foster trust and can lead to more favorable terms in the future. The accounts payable team also undertakes meticulous record keeping of organized documentation of all transactions, invoices, and payments. This record-keeping supports audit trails, financial reporting, and compliance. Additionally, the department often handles expense management, processing and reimbursing employee expense reports.

The Accounts Payable Process

The accounts payable process outlines sequential steps from invoice receipt to payment completion and recording. This structured workflow ensures accuracy, proper authorization, and efficient financial operations.

The process begins with invoice receipt, where invoices arrive through various channels (mail, email, EDI). Upon receipt, invoice review and matching occurs, involving a “three-way match.” This compares the invoice with the corresponding purchase order and the receiving report to confirm goods/services received and the billed amount is correct. This matching process is an internal control against fraud and errors.

After matching, the invoice proceeds to an approval stage, where authorized personnel approve payment. Once approved, invoice details are entered into the company’s accounting system, and general ledger accounts are debited and credited to reflect the liability. Payment scheduling then occurs, based on the vendor’s terms (e.g., net-30 or net-60).

Payment execution involves issuing payment to the vendor through methods such as checks, ACH transfers, or wire transfers. The process concludes with reconciliation, where AP records are compared against vendor statements and bank records to ensure accurate transactions and resolve discrepancies. This step is performed regularly to maintain accurate financial records and ensure obligations are met.