Accounts payable

Published Thursday 23 July 2026

Table of contents

• What is accounts payable?
• The accounts payable process
• Accounts payable best practices
• Examples of accounts payable transactions
• Accounts payable vs accounts receivable
• Is accounts payable an asset or liability?
• How to measure accounts payable: turnover and days payable outstanding
• Simplify accounts payable with Xero
• FAQs on accounts payable

Key takeaways

• Accounts payable is the money your business owes to suppliers for goods or services bought on credit, and it sits as a current liability on your balance sheet.
• A clear process of receiving, verifying, approving, and scheduling invoices helps you pay on time, avoid late fees, and keep vendor relationships strong.
• Best practices like approval workflows, three-way matching, and a solid audit trail reduce errors and stop duplicate or late payments.
• Tracking metrics such as accounts payable turnover and days payable outstanding shows you how quickly you pay suppliers and how well you manage cash flow.

What is accounts payable?

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

Managing AP well helps you avoid late fees, keep vendor relationships healthy, and make your cash flow more predictable.

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 reviews and approves supplier bills, schedules payments, answers vendor queries, and keeps accurate payment records.

For small businesses, you might handle accounts payable yourself or delegate it to a bookkeeper. Either way, effective AP processes help you avoid late fees, maintain strong vendor relationships, and keep accurate records for tax time, since corporations must file their income tax return within six months of the end of their fiscal period.

You can learn more about invoices or see more accounting terms in the glossary.

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 makes sure 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.

Accounts payable best practices

Strong controls turn accounts payable from a source of errors into a reliable routine. A few habits protect your cash and keep your records clean.

Follow these best practices to manage accounts payable with confidence:

• Set up approval workflows so the right people sign off on payments before money leaves your business, which is helpful when several team members or locations submit bills
• Use three-way matching to compare each invoice against its purchase order and receiving report before you pay
• Maintain an audit trail by keeping a dated record of every invoice, approval, and payment so you can trace who authorized what
• Avoid duplicate or late payments by scheduling bills against their due dates and flagging invoices you've already paid

Examples of accounts payable transactions

Accounts payable shows up in many day-to-day business activities. Recognizing these examples helps 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 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. One is money going out, and the other is money coming in.

Accounts payable is the money your business owes to others, appears as a current liability, and covers items like unpaid supplier invoices, utility bills, and rent.

Accounts receivable is the money others owe your business, appears as a current asset, and covers customer invoices you've sent but not yet collected.

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. Amounts owed to trade suppliers are often called trade payables, a common subset of accounts payable.

Both directly affect your cash flow, so 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. It's not an asset, since it reflects cash that will leave your business rather than come in.

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 is paid within 30 to 90 days
• Balance sheet placement: it appears under current liabilities, not assets

Current liabilities are debts you expect to pay within one year, and accounts payable falls into this category since most supplier terms require payment within 30 to 60 days. You can review the current liabilities glossary term for more detail.

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

How to measure accounts payable: turnover and days payable outstanding

Two simple metrics show how well you manage what you owe. Both use figures you already track in your accounts.

Accounts payable turnover measures how many times you pay off your suppliers over a period, usually a year. You work it out by dividing your total supplier purchases by your average accounts payable balance, so a higher number means you're clearing bills quickly.

Days payable outstanding (DPO) turns that into an average number of days you take to pay suppliers. A higher DPO means you hold onto your cash longer, while a lower DPO means you settle bills faster.

Reading these two figures together helps you balance healthy vendor relationships against keeping enough cash on hand.

Simplify accounts payable with Xero

Effective accounts payable management keeps your business running smoothly and your cash flow predictable. When you pay bills on time and track what you owe, you avoid late fees and build trust with your vendors.

Xero helps small businesses manage bills in one place, so you can track invoices, schedule payments, and keep clear records of what you owe. With automated bank feeds and invoice matching, Xero helps reduce manual AP work so you can spend more time running your business.

See how streamlined accounts payable management can benefit your business and get one month free.

FAQs on accounts payable

Here are answers to some frequently asked questions about accounts payable.

Is accounts payable a debit or credit?

You record accounts payable as a credit when you receive a supplier invoice, which increases 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 set payment terms of 30, 60, or 90 days, and paying within those terms protects your vendor relationships. If your cash flow allows, early payment discounts can save you money, and you can ask suppliers about extending terms when timing is tight.

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

Accounts payable is money you owe suppliers, while accounts receivable is money customers owe you. AP appears as a liability on your balance sheet, and AR appears as an asset.

What are days payable outstanding and accounts payable turnover?

Days payable outstanding is the average number of days you take to pay suppliers, and accounts payable turnover is how many times you clear your payables over a period. Together they show how quickly you pay bills and how you're managing cash flow.

Related terms

• Accounts receivable
• Invoice
• Current liabilities
• See more glossary terms

Learn more about accounts payable

• The accounts payable process
• Pay bills with Xero
• Managing finances and cash flow
• Xero small business guides