Accounts payable: What it is, how it works, and tips to manage

Published Thursday 25 September 2025

Table of contents

• What is accounts payable?
• Why does it matter?
• Examples of accounts payable
• Accounts payable vs accounts receivable
• How to manage accounts payable
• Modern accounts payable management
• Streamline your accounts payable with Xero
• FAQs on accounts payable

Key takeaways

• Implement a four-step accounts payable process by recording bills, approving payments, scheduling based on terms and cash flow, and processing payments to maintain organized financial records.
• Prioritize timely payment management to preserve supplier relationships and avoid late fees while strategically using payment terms to optimize your cash flow position.
• Automate your accounts payable processes using accounting software to reduce administration time by up to 75 per cent and minimize manual errors in bill processing.
• Monitor that your accounts receivable exceeds accounts payable on your balance sheet to maintain healthy cash flow and financial stability for your business.

What are accounts payable?

Accounts payable is money your business owes to suppliers for goods or services purchased on credit. It appears as a liability on your balance sheet until you pay the bills.

Key aspects of accounts payable include:

• receiving bills and invoices from suppliers for products or services
• agreeing on payment terms that determine when payment is due
• managing the cash flow impact from the timing of payments

Why does it matter?

Proper accounts payable management protects your business relationships and cash flow. Managing accounts payable well helps you avoid common business risks, such as:

Supplier relationship risks:

• Keep credit terms with key suppliers
• Ensure timely deliveries for your operations
• Maintain a strong reputation in your industry

Cash flow risks:

• Keep funds available for unexpected expenses
• Free up capital for business growth opportunities
• Avoid overdraft fees and financial strain

Examples of accounts payable

Accounts payable shows up in many day-to-day business activities. For example:

• Buy coffee beans from a roaster on 30-day payment terms
• Receive an invoice from a subcontractor for electrical work
• Purchase new season stock from a clothing wholesaler
• Pay a freelance graphic designer for a completed project

Accounts payable vs accounts receivable

Accounts payable is money you owe (money out), and accounts receivable is money owed to you (money in).

• Accounts payable (AP) is the money you owe to others. You record it as a liability on your balance sheet because you need to pay it.
• Accounts receivable (AR) is the money others owe to you for products or services you have sold. You record it as an asset because it represents future cash coming into your business.

How to manage accounts payable

The accounts payable process follows four key steps:

1. Record the bill by entering vendor invoices as liabilities in your accounting system
2. Approve payment by verifying goods or services were received as invoiced
3. Schedule payment by setting payment dates based on vendor terms and cash flow needs
4. Process payment by paying the bill and updating your records to clear the liability

Choose longer payment terms to improve cash flow, or pay early to get discounts if your cash position allows.

Your balance sheet, also called your statement of financial position, should show that accounts receivable is higher than accounts payable.

Modern accounts payable management

Modern accounts payable systems automate manual tasks, reduce administration time by up to 75 per cent, and minimize errors.

Automation options include:

• entering bills manually into your accounting software
• forwarding bills by email for automatic processing
• using apps to read and extract bill data automatically
• scheduling payments automatically based on terms and cash flow
• updating your ledger in real time when payments are processed

Businesses using automated accounts payable processes often save a full day per week for strategic work instead of bill processing. To learn how you can automate accounts payable, read the guide on automating accounts payable.

Streamline your accounts payable with Xero

Spend less time on administration and more time growing your business. Xero accounting software helps you manage bills, schedule payments, and see your cash flow clearly.

With automated data entry and simple payment runs, you can handle accounts payable with confidence.

Try Xero accounting software for free to see how it works for your business.

FAQs on accounts payable

Here are answers to some common questions about accounts payable.

What is the full accounts payable process?

The accounts payable process includes receiving an invoice from a supplier, checking it for accuracy, getting approval, scheduling the payment, making the payment, and recording it in your accounting system.

Is accounts payable a debit or a credit?

Accounts payable is a liability account and usually has a credit balance. When you receive a bill, you increase the accounts payable balance. When you pay the bill, you decrease the balance.

How does accounts payable affect cash flow?

Managing accounts payable helps you keep cash in your business. Pay bills on time to maintain healthy cash flow and give your business more flexibility.