Accounts payable: what it is, how it works, and examples

Published Monday 22 June 2026

Table of contents

• What is accounts payable?
• Examples of accounts payable
• How the accounts payable process works
• Accounts payable vs accounts receivable
• Is accounts payable an asset or liability?
• How to record accounts payable
• Best practices for managing accounts payable
• Manage accounts payable with Xero
• FAQs on accounts payable

Key takeaways

• Accounts payable (AP) is the money your business owes to suppliers and vendors for goods or services purchased on credit. It appears as a current liability on your balance sheet and directly affects your cash flow.
• The accounts payable process follows a clear cycle: receive invoices, verify and match them against purchase orders, approve expenses, schedule payments, and reconcile your records.
• Common examples of AP include supplier invoices, utility bills, professional service fees, equipment leases, and software subscriptions. Tracking them all in one place helps you stay organized and avoid late fees.
• Recording AP correctly using double-entry bookkeeping keeps your financial statements accurate and gives you a clear picture of your outstanding obligations at any time.

What is accounts payable?

Accounts payable (AP) is the money your business owes to suppliers and vendors for goods or services you've purchased on credit but haven't yet paid for. It represents your outstanding bills and short-term financial obligations.

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. In your supplier's records, that same amount appears as accounts receivable, the money they expect to collect from you.

AP can also refer to the business function or team responsible for managing these payments. In larger companies, a dedicated accounts payable department reviews invoices, schedules payments, and maintains accurate payment records. For small businesses, you might handle AP yourself or delegate it to a bookkeeper.

Regardless of who manages it, keeping your accounts payable organized helps you avoid late fees, maintain strong vendor relationships, and keep accurate financial records.

Examples of accounts payable

Accounts payable covers any amount your business owes for goods or services received on credit. Here are some of the most common categories.

• Supplier invoices: raw materials, inventory, or finished goods purchased from vendors on credit terms, such as a retailer ordering stock from a wholesaler with 30-day payment terms.
• Utility bills: electricity, water, internet, and phone services billed monthly after you've used them.
• Professional services: fees owed to accountants, lawyers, consultants, or marketing agencies for work completed but not yet paid for.
• Equipment leasing: monthly or quarterly payments for leased office equipment, vehicles, or machinery.
• Software subscriptions: recurring charges for business software, cloud services, or software as a service (SaaS) platforms billed in arrears.
• Rent and facilities: office space, warehouse, or co-working space charges invoiced on a regular schedule.

How the accounts payable process works

The accounts payable process is the cycle your business follows to receive, verify, and pay supplier invoices. A clear process helps you stay on top of payments and avoid costly mistakes.

1. Receive and capture invoices

Invoices arrive from suppliers by email, mail, or through an online portal. Capture each invoice as soon as it arrives and log key details: vendor name, invoice number, amount, and due date. Using software that pulls invoices in automatically saves time and reduces the risk of lost paperwork.

2. Verify and match invoices

Check each invoice against the original purchase order and delivery receipt to confirm you received the goods or services as agreed. This 3-way matching process catches pricing errors, duplicate invoices, and unauthorized charges before you pay.

3. Code and approve expenses

Assign each invoice to the correct expense category in your accounting system. Then route it to the right person for approval based on your business's spending policies. Clear approval workflows prevent unauthorized payments and keep your records organized.

4. Schedule and execute payment

Once approved, schedule the payment according to the supplier's terms. Some businesses pay immediately to capture early-payment discounts, while others schedule payments closer to the due date to manage cash flow. Automating payment scheduling helps you avoid late fees.

5. Record and reconcile

After payment, record the transaction in your accounting system and reconcile it against your bank statement. Regular reconciliation ensures your accounts payable balance is accurate and your financial reports reflect the true state of your business.

Accounts payable vs accounts receivable

Accounts payable and accounts receivable sit on opposite sides of every business transaction. Understanding the difference helps you track money flowing in and out of your business.

Accounts payable is money your business owes to others. It appears as a liability on your balance sheet because it represents cash that will leave your business. Common examples include unpaid supplier invoices, utility bills, and rent.

Accounts receivable is money others owe your business. It appears as an asset on your balance sheet because it represents cash you expect to collect. A typical example is a customer invoice you've sent but haven't been paid for yet.

Both directly affect your cash flow. Accounts payable represents money going out, while accounts receivable represents money coming in. Tracking both gives you a clear picture of your business's financial position at any point.

Is accounts payable an asset or liability?

Accounts payable is a liability because it represents money your business owes to others. Specifically, it's classified as a current liability on your balance sheet.

AP falls into the liability category for several reasons.

• It's a financial obligation: you have a legal duty to pay these amounts.
• It represents a money outflow: cash will leave your business when you settle the balance.
• It's time-sensitive: most AP must be paid within 30 to 90 days.
• It sits under current liabilities on your balance sheet, not assets.

Current liabilities are debts you expect to pay within 1 year. Accounts payable typically falls into this group because most supplier terms require payment within 30 to 60 days. Understanding this classification helps you maintain accurate financial records for tax reporting and business planning.

How to record accounts payable

Recording accounts payable correctly keeps your financial statements accurate and gives you a reliable view of what your business owes. AP uses double-entry bookkeeping, where every transaction affects 2 accounts.

When you receive an invoice from a supplier, you record a journal entry with 2 parts.

• Debit the relevant expense or asset account (for example, office supplies or inventory) to reflect the goods or services received.
• Credit the accounts payable account to reflect the new amount you owe.

For example, if you receive a $500 invoice for office supplies, you'd debit your office supplies expense account by $500 and credit your accounts payable account by $500.

When you pay the invoice, you reverse the AP entry.

• Debit the accounts payable account (reducing what you owe).
• Credit your cash or bank account (reflecting the payment leaving your account).

Using accounting software simplifies this process. When you enter a bill in Xero, the system automatically creates the correct journal entries, so you don't need to record debits and credits manually.

Best practices for managing accounts payable

Strong AP management helps you avoid late fees, maintain good vendor relationships, and keep your cash flow predictable. These practices make a real difference for small businesses.

• Process invoices promptly: log every invoice as soon as it arrives and verify it against your purchase order. Delays in processing are a common cause of late payments.
• Negotiate payment terms: ask suppliers for terms that align with your cash flow cycle. Even extending terms from 15 to 30 days can give you more flexibility.
• Reconcile regularly: compare your AP records against bank statements weekly or monthly to catch errors, duplicate payments, or missed invoices early.
• Track key metrics: monitor your days payable outstanding (DPO) and AP turnover ratio to spot trends. A rising DPO may signal cash flow issues, while a falling one shows you're paying faster.
• Automate where you can: use software to capture invoices, send payment reminders, and schedule payments automatically. Automation reduces manual errors and frees up your time.

According to Xero Small Business Insights, late payment times for US small businesses dropped steadily throughout 2025, falling from 9.3 days late in Q1 to 7.8 days late in Q4; the shortest since late 2021 and a full day below the long-term average. That trend suggests more businesses are prioritizing timely AP management, and the payoff is real.

Manage accounts payable with Xero

Keeping your accounts payable organized doesn't have to mean hours of manual data entry and chasing paper invoices. Xero brings your bills, payments, and records together in one place so you can see exactly what you owe and when it's due.

With Xero, you can capture bills automatically using Hubdoc, match invoices to bank transactions, and schedule payments to stay on top of due dates. Automated reminders help you avoid late fees, and real-time reporting gives you a clear view of your outstanding obligations at any time.

Whether you're managing AP yourself or working with a bookkeeper, Xero simplifies the process so you can spend less time on admin and more time running your business. Get one month free.

FAQs on accounts payable

Here are answers to frequently asked questions about accounts payable.

What is the difference between accounts payable and accounts receivable?

Accounts payable is money your business owes to suppliers for goods or services received on credit. Accounts receivable is the opposite: money your customers owe you for goods or services you've provided.

Is accounts payable a debit or credit?

Accounts payable carries a normal credit balance. When you receive an invoice, you credit accounts payable to increase it; when you make a payment, you debit accounts payable to reduce it.

How do you record a journal entry for accounts payable?

Debit the appropriate expense or asset account and credit accounts payable for the invoice amount. When you pay, debit accounts payable and credit your cash or bank account.

What is the difference between trade payables and accounts payable?

Trade payables are a subset of accounts payable that specifically covers amounts owed for goods purchased from suppliers. Accounts payable is broader and includes trade payables plus other obligations like utility bills and service fees.

Is accounts payable an asset or liability?

Accounts payable is a current liability on your balance sheet. It represents money your business owes and expects to pay within 1 year, typically within 30 to 60 days.

What is the accounts payable process?

The accounts payable process covers receiving invoices, verifying them against purchase orders, approving expenses, scheduling payments, and reconciling records. A clear process helps you pay on time and keep accurate financial records.