Accounts payable: definition, process and examples

Published Friday 20 March 2026

Table of contents

• What is accounts payable?
• The accounts payable process
• Examples of accounts payable transactions
• Accounts payable vs accounts receivable
• Is accounts payable an asset or liability?
• Managing accounts payable with Xero
• FAQs on accounts payable

Key takeaways

• Implement a clear accounts payable process by receiving invoices, verifying details against purchase orders, approving payments, and scheduling them according to due dates to avoid late fees and maintain strong vendor relationships.
• Recognize that accounts payable appears as a current liability on your balance sheet because it represents money your business owes to suppliers, which directly impacts your cash flow and financial planning.
• Pay supplier invoices within the agreed terms of 30, 60, or 90 days to maintain good vendor relationships and avoid late fees, while taking advantage of early payment discounts when your cash flow allows.
• Utilize accounting software to automate invoice processing, payment scheduling, and record keeping, which reduces manual work and helps you track what you owe and when payments are due.

What is accounts payable?

Accounts payable (AP) is money your business owes to suppliers and vendors for goods or services purchased on credit. It represents your outstanding bills and appears as a current liability on your balance sheet.

Managing AP effectively helps you avoid late fees, maintain vendor relationships, and keep cash flow predictable. This is especially critical in a volatile economy, where a Bank of Canada survey found over 60% of firms experienced a decline in revenues in a single year.

Think of accounts payable as unpaid invoices sitting on your desk. Common examples include:

• Purchasing inventory: buy raw materials, stock, or equipment on credit
• Paying utilities: pay electricity, phone, internet, or water bills
• Using professional services: engage legal, consulting, or maintenance providers
• Renting space or equipment: lease office space, vehicles, or machinery

Here's how it works: when you buy materials from a supplier on credit, they send you an invoice. That invoice amount becomes part of your accounts payable until you pay it.

According to the Canada Revenue Agency, payment becomes due on the earliest of the invoice issue date, the invoice date itself, or the date specified in a written agreement.

From your supplier's perspective, that same invoice appears as accounts receivable in their records. It's money they expect to collect from you.

Accounts payable can also refer to the business function or team responsible for managing these payments. In larger companies, the accounts payable department handles:

• Reviewing invoices: verifying and approving supplier bills for accuracy
• Scheduling payments: ensuring bills are paid on time according to terms
• Answering queries: responding to vendor questions about payment status
• Maintaining records: keeping accurate payment histories for reporting

For small businesses, you might handle accounts payable yourself or delegate it to a bookkeeper.

Regardless of who manages it, effective AP processes help you avoid late fees, maintain strong vendor relationships, and keep accurate records for tax time, as corporations must file their income tax return within six months of the end of their fiscal period.

Learn more about invoices

See more accounting terms

The accounts payable process

The accounts payable process is a series of steps your business follows to manage the money it owes to suppliers. A clear process ensures you pay bills accurately and on time.

Here are the typical steps in the accounts payable cycle:

1. Receive the invoice from your supplier or vendor.
2. Verify the invoice details, checking for accuracy against your purchase order or delivery receipt.
3. Approve the invoice for payment once it's confirmed to be correct.
4. Schedule the payment according to the invoice due date and your cash flow.
5. Process the payment to the supplier.
6. Record the transaction in your accounting software to update your financial records.
7. File all related documents, like the invoice and proof of payment, for your records.

Examples of accounts payable transactions

Accounts payable shows up in many day-to-day business activities. Understanding these examples can help you identify and track what you owe.

Common accounts payable transactions include:

• Raw materials: purchasing supplies from a vendor on 30-day credit terms
• Utility bills: receiving a monthly bill for electricity or internet services that you'll pay later
• Professional services: hiring a consultant or lawyer who invoices you for their work
• Office rent: your monthly lease payment for your workspace
• Equipment leases: payments for rented machinery or office equipment

Accounts payable vs accounts receivable

Accounts payable and accounts receivable represent opposite sides of business transactions. The main difference is:

Accounts payable (what you owe):

• Definition: money your business owes to others
• Balance sheet placement: appears as a current liability
• Examples: unpaid supplier invoices, utility bills, rent

Accounts receivable (what others owe you):

• Definition: money others owe your business
• Balance sheet placement: appears as a current asset
• Examples: customer invoices sent but not yet paid

When you buy office supplies on credit, that unpaid invoice is your accounts payable. When you sell products and invoice a customer, that becomes your accounts receivable until they pay.

Both directly affect your cash flow: AP represents money going out, while AR represents money coming in. Balancing the two keeps your business financially healthy.

Is accounts payable an asset or liability?

Accounts payable is a current liability on your balance sheet because it represents money your business owes to others.

Here's why AP is classified as a liability:

• Financial obligation: you have a legal duty to pay these amounts
• Cash outflow: AP represents money that will leave your business
• Time-sensitive: most AP must be paid within 30–90 days
• Balance sheet placement: appears under current liabilities, not assets

Current liabilities are debts you expect to pay within one year. Accounts payable falls into this category since most supplier terms require payment within 30–60 days.

Understanding this classification helps you manage cash flow, prepare accurate tax reports, and plan your business finances with confidence.

Managing accounts payable with Xero

Effective accounts payable management keeps your business running smoothly and your cash flow predictable. Strong AP management helps you avoid late fees, maintain vendor relationships, and keep cash flow predictable.

Key benefits of streamlined AP management:

• Avoid late fees: use automated reminders to pay bills on time
• Strengthen vendor relationships: make consistent, reliable payments
• Improve cash flow visibility: track what you owe and when payments are due
• Reduce manual work: automate invoice processing and payment scheduling
• Support business planning: maintain accurate AP records for forecasting

Xero's accounts payable features help small businesses manage bills efficiently. Track invoices, schedule payments, and maintain clear records of what you owe, all from one platform.

With automated bank feeds and invoice matching, Xero reduces manual AP work so you can spend more time running your business. When you manage your bills effectively, you build trust with your vendors and gain a clearer picture of your business's financial health.

Get one month free to see how streamlined accounts payable management can benefit your business.

FAQs on accounts payable

Find answers to common questions about accounts payable below.

What does accounts payable do?

Accounts payable refers to the money your business owes to suppliers for goods or services bought on credit. It can also describe the department that manages and pays these outstanding bills.

Is accounts payable a debit or credit?

You record accounts payable as a credit entry in your accounting records. When you receive a supplier invoice, you credit accounts payable to increase the liability. When you pay the bill, you debit accounts payable to reduce what you owe.

How long should you take to pay accounts payable?

Most supplier invoices include payment terms of 30, 60, or 90 days. For items like leases, official guidance states that payment becomes due on the day the recipient is required to pay pursuant to the agreement.

Paying within these agreed terms is key to maintaining good vendor relationships and avoiding late fees. Some suppliers offer early payment discounts, which can save money if your cash flow allows.

What's the difference between accounts payable and accounts receivable?

Accounts payable is money you owe to suppliers for goods or services purchased on credit. Accounts receivable is money your customers owe you for products or services you've provided. Accounts payable appears as a liability on your balance sheet, while accounts receivable appears as an asset.

Is accounts payable an asset or liability?

Accounts payable is a current liability on your balance sheet because it represents money you owe to others. This classification affects your business's financial ratios and how lenders view your company's obligations.

How do you record accounts payable?

To record accounts payable:

1. Receive a supplier invoice.
2. Credit your accounts payable account.
3. Debit the relevant expense or asset account.

When you pay the invoice:

1. Debit accounts payable.
2. Credit your cash or bank account.

Accounting software like Xero automates this process for you.