Accounts payable: definition, process and examples

Published Wednesday 4 March 2026

Table of contents

• What is accounts payable?
• Accounts payable vs accounts receivable
• Why it matters
• Accounts payable examples
• Accounts payable process steps
• How to record accounts payable
• How to automate accounts payable
• Manage accounts payable with Xero
• FAQs on accounts payable

Key takeaways

• Implement a consistent seven-step accounts payable process from placing orders through recording payments to avoid errors, capture early-payment discounts, and maintain strong supplier relationships.
• Automate your accounts payable system using accounting software to reduce manual processing time, prevent duplicate payments, and gain better cash flow visibility through automated invoice capture and payment scheduling.
• Schedule payments strategically to balance maintaining adequate cash flow with capturing early-payment discounts, as 76% of suppliers offer better terms to customers who pay early.
• Record accounts payable transactions correctly based on your accounting method—enter expenses when you receive invoices for accrual accounting or when you make payments for cash accounting—to keep your financial reports accurate.

What is accounts payable?

Accounts payable (AP) is the money your business owes to suppliers and vendors for goods or services received but not yet paid for. It appears as a liability on your balance sheet and represents short-term debt that must be settled within a set period, typically 30 to 90 days.

Accounts payable vs accounts receivable

Accounts payable and accounts receivable are opposite sides of the same transaction. Understanding the difference helps you manage cash flow and keep your books accurate.

• Accounts payable (AP): Money your business owes to suppliers for goods or services you've received but haven't paid for yet. AP is a liability on your balance sheet.
• Accounts receivable (AR): Money owed to your business by customers for goods or services you've delivered but haven't been paid for yet. AR is an asset on your balance sheet.

Both affect your cash flow. AP represents money going out; AR represents money coming in. Tracking both gives you a clearer picture of your business's financial health.

Why it matters

Managing accounts payable well protects your cash flow, your supplier relationships, and your reputation. Here's why it matters:

• Supplier relationships: Paying on time keeps vendors happy, which can lead to early-payment discounts or more flexible terms. Research shows that 76% of suppliers offer better terms or prioritise service for customers who pay early.
• Cash flow visibility: Tracking what you owe helps you avoid running out of money when bills come due.
• Business reputation: Consistent payments build trust and prevent awkward conversations with suppliers chasing overdue invoices.

A well-organised AP process, especially when managed through accounting software, gives you control over when money leaves your business.

Accounts payable examples

Accounts payable includes any bill your business receives for goods or services before you pay for them. Here are common examples:

• Supplier invoices: Raw materials, inventory, or products purchased on credit
• Utility bills: Electricity, water, internet, and phone services
• Rent and lease payments: Office space, equipment, or vehicle leases
• Professional services: Accountant fees, legal services, or consulting
• Contractor payments: Freelancers or subcontractors who invoice after completing work
• Office supplies: Stationery, software subscriptions, or equipment

If you've received the goods or services but haven't paid yet, it's accounts payable.

Accounts payable process steps

The accounts payable process covers every step from ordering goods or services through to making the final payment. Following a consistent process helps you avoid errors, capture discounts, and maintain healthy supplier relationships.

Here are the seven steps in a typical AP workflow.

1. Placing orders

Clear orders prevent billing disputes and delays. Before confirming any purchase:

• Specify exactly what you need: Give vendors precise details so they can deliver correctly.
• Review quotes against your budget: Confirm pricing matches your expectations before approving.
• Agree on payment terms upfront: Know when payment is due and whether there's flexibility.
• Assign a purchase order number: Use PO numbers to track expenses and match invoices later.
• Confirm where to send invoices: Provide a dedicated email address to avoid administrative delays.

2. Receiving invoices

Use a dedicated email address for all invoices so bills land in one searchable location. Digital copies are easier to organise and track than paper.

Review each invoice as soon as it arrives to catch any errors early. Accounting software like Xero can automatically scan emailed bills and create a report of what you owe and when.

3. Approving (or disputing) invoices

Before approving any invoice, verify the details are correct:

• Check the items or services: Confirm the invoice matches what you actually received.
• Verify the amount: Make sure pricing aligns with your original quote or agreement.
• Get internal approval: Forward to partners or project managers if your process requires sign-off.

If you spot any errors, contact the supplier straight away. Addressing mistakes while the transaction is fresh prevents disputes when the bill becomes overdue.

4. Recording the amount owed

Record the invoice amount and due date in your accounting system as soon as you approve it. When you record the expense depends on your accounting method:

• Accrual accounting: Enter the expense when you receive the invoice, before payment.
• Cash accounting: Enter the expense only when you make the payment.

This distinction affects your financial reports, so choose the method that matches how you track your business finances. For example, businesses that exceed a specific threshold in annual revenue, such as $25 million in the US, are often required to use accrual accounting for tax purposes.

5. Scheduling payment

Schedule payments to balance two goals: having enough cash on hand and capturing any early-payment discounts.

Accounting software can help by showing scheduled payments in your cash flow forecast. This lets you see whether you'll have the funds available when bills come due.

If cash flow is tight, consider these options:

• Negotiate new terms: Contact suppliers early to request extended deadlines or payment plans.
• Avoid credit where possible: Credit cards and loans add interest costs that eat into your margins.
• Get professional advice: If you're relying on credit regularly, ask a bookkeeper or accountant to review your finances.

6. Executing payment

Once approved and scheduled, follow through by making the payment on time. To avoid missed payments:

• Set up automated payments: Let your software pay recurring bills automatically.
• Block time for bill payments: Schedule a regular slot each week to process invoices.
• Use payment reminders: Configure alerts in your accounting software for upcoming due dates.

7. Recording payment

Once you make the payment, the AP process is complete. The paid invoice moves from accounts payable (a liability) to an expense on your records.

If you use cash accounting, this is when you record the expense in your ledger. The bill is no longer part of your outstanding accounts payable balance.

How to record accounts payable

Recording accounts payable correctly keeps your financial reports accurate and helps you track what you owe. Here's how it works.

When you receive an invoice, you create a journal entry:

• Debit the expense account (or asset account for inventory)
• Credit accounts payable

This increases your liabilities and records the expense. When you pay the invoice, you reverse the AP entry:

• Debit accounts payable
• Credit your bank account

The timing of when you record expenses depends on your accounting method. With accrual accounting, you record the expense when you receive the invoice. With cash accounting, you record it when you pay.

How to automate accounts payable

Accounts payable automation reduces manual work and helps you avoid errors. Despite available technology, many AP teams still spend over 10 hours a week manually processing invoices.

Accounting software like Xero handles repetitive tasks automatically, reducing manual work and the risk of errors. The market for this technology is projected to grow at a 21.4% annual growth rate.

Here's what AP automation can do:

• Capture invoices automatically: Scan emailed bills and enter amounts and due dates into your system.
• Forecast cash flow: Show projected balances on payment due dates so you can plan ahead.
• Record expenses accurately: Enter amounts into your accounting ledger at the right time based on your accounting method.

Learn more about Xero's accounts payable automation.

Manage accounts payable with Xero

Managing accounts payable can be straightforward with the right tools. Xero automates invoice capture, tracks what you owe, and helps you maintain healthy cash flow, all in one place.

Ready to simplify your accounts payable? Get one month free and see how Xero helps you stay on top of bills while focusing on growing your business.

FAQs on accounts payable

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

Is managing accounts payable difficult for small businesses?

Managing AP manually can be time-consuming, but it becomes straightforward once you have a consistent process. Accounting software simplifies the work by automating invoice tracking, payment reminders, and record-keeping.

What are common accounts payable mistakes to avoid?

The most common mistakes include paying invoices late, making duplicate payments, losing track of paper invoices, and skipping approval steps. Another significant risk is fraud, with research showing that a majority of finance teams want more fraud training to combat it.

How long should I keep accounts payable records?

Keep AP records for at least seven years to meet tax requirements and support any audits. Digital records stored in accounting software make long-term storage and retrieval easier.

Can I manage accounts payable without accounting software?

Yes, though accounting software saves time and improves accuracy. Spreadsheets work for very small volumes, but as your business grows, software saves time and improves accuracy.