Accounts payable process: steps, workflow and tips

Published Monday 30 March 2026

Table of contents

• What is accounts payable?
• Accounts payable vs accounts receivable
• Why it matters
• Accounts payable process steps
• Best practices for accounts payable management
• How to automate accounts payable
• Streamline your accounts payable with Xero
• FAQs on accounts payable

Key takeaways

• Implement three-way matching by comparing your purchase order, goods receipt, and invoice before approving payment to prevent overpayments and catch errors early.
• Schedule payments strategically to capture early payment discounts when cash flow allows, while using accounting software to forecast whether you'll have sufficient funds when bills are due.
• Automate your accounts payable process using software to handle data entry, payment scheduling, and record keeping, which can reduce processing costs by up to 78% compared to manual methods.
• Communicate proactively with suppliers about any payment delays before due dates pass to maintain strong vendor relationships and protect your business reputation.

What is accounts payable?

Accounts payable (AP) is the money your business owes to suppliers for goods or services you've received but haven't yet paid for. The full-cycle accounts payable process covers every step from placing an order through to recording the final payment.

Accounts payable vs accounts receivable

Accounts payable (AP) is money you owe to suppliers. Accounts receivable (AR) is money customers owe to you. They're opposite sides of the same transaction.

• Accounts payable: Your unpaid bills for goods or services you've received
• Accounts receivable: Invoices you've sent to customers who haven't paid yet

AP is a liability on your balance sheet. AR is an asset. Managing both well keeps cash flowing in and out of your business on time.

Why it matters

A well-organised accounts payable process protects your cash flow, your vendor relationships, and your reputation. Here's why it matters:

• Vendor relationships: Paying on time keeps suppliers happy and can unlock early payment discounts or better terms
• Cash flow visibility: Tracking what you owe and when helps you plan for upcoming expenses
• Business reputation: Consistent payments build trust and keep your supply chain running smoothly

The AP automation market is projected to reach $1.47 billion in 2025. When managed through accounting software, AP becomes part of a stronger cash flow management strategy.

Accounts payable process steps

The accounts payable process starts when you order products or services and finishes when payments are recorded. Here's an overview of the seven steps:

1. Placing orders
2. Receiving invoices
3. Approving or disputing invoices
4. Recording the amount owed
5. Scheduling payment
6. Executing payment
7. Recording payment

Let's break down each step.

1. Placing orders

Placing orders is the first step in the AP cycle. Clear communication here prevents problems later.

• Be specific: Your vendor needs to know exactly what you want them to deliver
• Review quotes carefully: Check that estimates match your order and fit your budget
• Discuss payment terms upfront: Find out when payment is due and whether there's flexibility
• Authorise the expense: Once price and terms are agreed, approve the purchase
• Assign a purchase order (PO) number: If you use POs, assign one now so the vendor can include it on their invoice
• Confirm invoice delivery: Make sure the supplier knows where to send the invoice

2. Receiving invoices

Receiving invoices marks the point where you formally track what you owe.

• Use a dedicated email address: Keep all bills in one place for easier searching and filing
• Keep digital copies: Electronic invoices are easier to find and back up than paper
• Open bills immediately: Check for errors or unexpected charges while details are fresh
• Use software to automate: Tools like Xero can scan emailed bills and create reports of what you owe and when

3. Approving or disputing invoices

Approving invoices means verifying that what you're being charged matches what you ordered and received. This is a crucial step when research shows that 79% of businesses experienced payment fraud in 2024.

• Check the details: Confirm the invoice lists the correct goods or services at the agreed price
• Get sign-off if needed: Forward to partners or project managers for final approval
• Raise issues quickly: Contact the supplier immediately if you spot mistakes, while details are fresh

What is three-way matching?

Three-way matching compares three documents before approving payment:

• Purchase order (PO): What you ordered
• Goods receipt: What you actually received
• Invoice: What you're being charged

If all three match, the invoice is approved. If they don't, you investigate before paying.

For small businesses processing fewer invoices, three-way matching may be more effort than you need. But as you grow, it becomes a useful control to prevent overpayments and errors, especially since automation can help businesses save an average of $12,000 monthly compared to manual processing.

4. Recording the amount owed

Recording the amount owed means entering the invoice into your accounting system so you can track the liability.

Log the amount and due date as soon as the invoice is approved. When you record the expense depends on your accounting method:

• Accrual accounting: Record the expense when you receive the invoice
• Cash accounting: Record the expense when you make the payment

Learn more about cash vs accrual accounting.

5. Scheduling payment

Scheduling payment means choosing when to pay based on your cash position and any available discounts.

Ideally, you want to time payments so you have enough cash on hand and can capture early payment discounts. These goals sometimes compete.

If you're using accounting software, scheduled payments flow into your cash flow forecast. You can see whether you'll have the money when the bill is due. If not, adjust your plan early.

Not using software yet? Start with the free cash flow forecasting template.

If you can't meet the deadline:

• Contact the supplier to negotiate a new due date or payment plan
• Use direct payment methods when possible: Credit cards and bank credit add interest costs
• If you rely on credit often, ask a bookkeeper or accountant to review your finances

6. Executing payment

Executing payment is when you actually transfer the funds to your supplier.

The invoice is approved and scheduled. Now follow through. To ensure timely payments:

• Schedule automated payments: Set up recurring transfers for regular suppliers
• Create a dedicated payment time: Block time weekly or fortnightly to process invoices
• Use software reminders: Let your accounting software alert you when payments are due

7. Recording payment

Recording payment closes the loop on the accounts payable process.

Once the payment is made, update your records. If you use cash accounting, this is when you enter the expense into your ledger. The bill moves out of accounts payable and into your paid expenses.

Keep copies of payment confirmations for your records and to help reconcile accounts.

Best practices for accounts payable management

Strong AP habits help you maintain accuracy, capture discounts, and maintain good vendor relationships. Here are some tips:

• Use a dedicated AP email: Keep all invoices in one place for easier tracking
• Verify details before approving: Check quantities, prices, and terms match your order
• Track payment deadlines centrally: Use a calendar, spreadsheet, or software to see what's due when
• Take early payment discounts: Pay early when cash allows to save money
• Communicate with vendors: Let suppliers know if you'll be late, before the due date passes
• Keep digital records: Store invoices and payment confirmations for audits and to reconcile accounts
• Review AP metrics: Track days payable outstanding (DPO) to spot trends and improve efficiency

How to automate accounts payable

Accounts payable automation uses software to handle repetitive tasks like data entry, payment scheduling, and record keeping, with automated processes reducing costs by 78% in some cases. This frees up your time and improves accuracy.

Software like Xero can:

• Capture invoices automatically: Read emailed bills and enter amounts and due dates into your AP
• Forecast cash flow: Show projected balances on due dates and after payments
• Update your ledger: Enter expenses into your accounting records at the right time

Learn more about Xero's accounts payable automation.

Streamline your accounts payable with Xero

A clear accounts payable process saves time, protects cash flow, and keeps your vendor relationships strong. Whether you're managing a handful of invoices or scaling up, the right system helps you stay organised and pay on time.

Xero helps you track bills, schedule payments, and see what's due at a glance. Get one month free when you try Xero today.

FAQs on accounts payable

Common questions about managing your accounts payable process.

What is three-way matching in accounts payable?

Three-way matching compares your purchase order, goods receipt, and invoice before approving payment. If all three documents match, the invoice is approved.

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

Accounts payable is money you owe to suppliers. Accounts receivable is money customers owe to you.

What is the procure-to-pay (P2P) process?

Procure-to-pay covers the full cycle from requesting goods to paying the supplier. Accounts payable is the payment portion of this larger process.

How long should accounts payable processing take?

Most businesses aim to process invoices within 30 days of receiving them. Automation can reduce processing time significantly, with leading teams using it to approve invoices in just 3.2 days on average, compared to 19.5 days for manual methods.

Do I need special software to manage accounts payable?

You can manage AP manually with spreadsheets, but software like Xero automates data entry, tracks due dates, and improves accuracy as your invoice volume grows.