Accounts payable: definition, process steps and tools

Published Wednesday 4 March 2026

Table of contents

• What is accounts payable
• Accounts payable versus accounts receivable
• Why it matters
• Accounts payable process steps
• How to automate accounts payable
• Streamline your accounts payable with Xero
• FAQs on accounts payable

Key takeaways

• Establish a dedicated email address for receiving invoices and verify each invoice against goods received, costs, and approvals before recording the amount owed to avoid payment errors and disputes.
• Schedule payments strategically to maintain cash flow while capturing early payment discounts, as missed discounts can cost businesses with $1 million in annual purchases up to $20,000 per year.
• Automate your accounts payable process using software to reduce processing costs by up to 70% and eliminate manual error rates that can reach 40% with traditional methods.
• Negotiate payment terms with suppliers before approving expenses, discussing due dates, flexibility options, and early payment discounts to strengthen relationships and improve cash flow management.

What is accounts payable

Accounts payable (AP) is the money your business owes to suppliers and vendors for goods or services you've received but haven't yet paid for. AP appears as a current liability on your balance sheet, and major accounting standards like IFRS and US GAAP require reclassification or disclosure when the nature of the liability changes.

The full AP cycle runs through several steps, from getting quotes through to approving and executing payments.

Accounts payable versus accounts receivable

Accounts payable (AP) and accounts receivable (AR) are opposites:

• Accounts payable: Money your business owes to suppliers and vendors
• Accounts receivable: Money owed to your business by customers

Both appear on your balance sheet but in different places. AP is a current liability (what you owe), while AR is a current asset (what you're owed).

Understanding the difference helps you manage cash flow. AP represents money going out, AR represents money coming in. Tracking both gives you a complete picture of your business finances.

Why it matters

Good accounts payable management protects your cash flow, supplier relationships, and business reputation. Here's why it matters:

• Supplier relationships: Paying on time keeps suppliers happy. This can lead to early payment discounts or longer payment terms. For a business with $1 million in annual purchases, missed discounts could cost as much as $20,000 per year.
• Cash flow visibility: A well-organised AP process helps you see what's due and when, so you don't run out of money.
• Business reputation: Consistent, on-time payments build trust and protect your standing with vendors.

When managed through accounting software, AP becomes part of a broader cash flow management strategy that helps you make better decisions.

Accounts payable process steps

The accounts payable process covers every step from ordering goods or services through to making final payment. It typically includes seven stages: placing orders, receiving invoices, approving invoices, recording amounts owed, scheduling payment, executing payment, and recording payment.

Here's how each step works.

1. Placing orders

Be clear when placing orders. Your vendor needs to know exactly what you want so they can deliver it. Review quotes and estimates to confirm they match your order and fit your budget.

Discuss payment terms before you approve the expense:

• Due date: Find out when payment will be due.
• Flexibility: Ask if there's room to negotiate terms.
• Purchase order: Assign a PO number if that's part of your process.

Once price and terms are agreed, authorise the expense. Make sure the supplier knows where to send their invoice to avoid administrative delays.

2. Receiving invoices

Use a dedicated email address for receiving invoices. This keeps all your bills in one place and gives you digital copies that are easier to search.

With software like Xero, you can automatically scan emailed bills and see a report of what you owe and when. Open all bills when you receive them to check for any surprises.

3. Approving or disputing invoices

Before approving an invoice, verify these details:

• Goods or services: Confirm the invoice matches what you received.
• Cost: Check the amount is correct.
• Approval: Forward to partners or project managers if needed.

Contact the supplier straight away if you spot any mistakes. Address issues while the bill is fresh in everyone's minds, not when it's overdue.

4. Recording the amount owed

Once you've verified the invoice, record how much you owe and when the bill is due.

When you record this depends on your accounting method:

• Accrual-based accounting: Enter the expense as soon as you record the invoice.
• Cash-based accounting: Enter the expense when you make the payment.

Learn more about cash versus accrual accounting.

5. Scheduling payment

Schedule payments for a time when you'll have enough cash to cover them and can access any early-payment discounts. These two goals sometimes compete.

If you're using accounting software, the scheduled payment flows straight through to your cash flow forecast. You can see if you'll have the money to pay on time. If not, make adjustments early.

If you're not using software yet, download our free cash flow forecasting template.

If you need more time to pay:

• Contact the supplier to negotiate a new due date or payment plan.
• Avoid credit cards or bank credit where possible. They add interest costs. For example, borrowing $50,000 at an 8% annual rate can result in $4,000 in financing costs.
• If you're relying on credit regularly, ask a bookkeeper or accountant to review your finance arrangements.

6. Executing payment

At this point, the invoice is approved and the payment is scheduled. Follow through and make the payment as planned.

To stay on top of payments:

• Schedule automated payments through your accounting software.
• Set aside dedicated time each week for paying invoices.
• Set up payment reminders in your accounting software.

7. Recording payment

Once you make the payment, the AP process is complete. If you use cash accounting, enter the expense into your accounting ledger at this time.

Paid bills are no longer part of accounts payable. They move from liabilities to expenses on your financial statements.

How to automate accounts payable

Accounts payable automation software handles the repetitive parts of accounts payable so you can focus on running your business, and it can also reduce processing costs by up to 70% while improving payment accuracy.

• Invoice capture: Reads emailed invoices and enters amounts and due dates automatically.
• Cash flow visibility: Shows projected cash balances on due dates and after payments.
• Ledger entries: Records amounts in your accounting ledger at the right time.

Learn more about Xero's accounts payable automation.

Streamline your accounts payable with Xero

Automating accounts payable saves time and improves accuracy. Research shows manual processing can have error rates nearing 40%.

On-time payments strengthen supplier relationships, and clear visibility makes cash flow easier to predict.

Xero simplifies AP by automating invoice capture, tracking due dates, and showing you exactly what's owed and when. You spend less time on admin and more time running your business.

Ready to take control of your accounts payable? Get one month free and see how Xero can help.

FAQs on accounts payable

Here are answers to common questions about managing accounts payable for your small business.

What is the difference between accounts payable and accounts receivable?

Accounts payable is money your business owes to suppliers, while accounts receivable is money customers owe to you. AP is a liability on your balance sheet, AR is an asset.

How does accounts payable appear on my balance sheet?

Accounts payable appears as a current liability on your balance sheet. It represents short-term debts you expect to pay within 12 months.

Why is it important to pay suppliers on time?

Paying on time helps you avoid penalty fees, maintain strong supplier relationships, and access early payment discounts. Consistent on-time payments help you maintain flexible payment terms and strong supplier partnerships.

Can I negotiate payment terms with my suppliers?

Yes, many suppliers are open to negotiating payment terms, especially for reliable customers. Ask about extended due dates, payment plans, or early payment discounts before you approve an expense.

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

Accounts payable covers informal short-term debts to suppliers for goods and services. Notes payable refers to formal written agreements, often for larger amounts with specified interest rates and repayment schedules.