What is accounts payable? Process, examples and tips

Published Monday 30 March 2026

Table of contents

• What is accounts payable
• Accounts payable vs accounts receivable
• Accounts payable examples
• Why accounts payable matters
• Accounts payable process steps
• How to automate accounts payable
• Simplify your accounts payable with Xero
• FAQs on accounts payable

Key takeaways

• Implement a structured seven-step accounts payable process from placing orders through recording payments to avoid errors, capture early payment discounts, and maintain accurate financial records.
• Prioritise paying suppliers on time to strengthen vendor relationships, as research shows suppliers receiving consistent early payments are 78% more likely to renew contracts and offer better terms.
• Use dedicated email addresses and accounting software to automate invoice capture, payment scheduling, and cash flow forecasting, which reduces manual work and prevents missed payment deadlines.
• Schedule payments strategically to balance cash flow needs with early payment discount opportunities, and contact suppliers proactively if you can't meet deadlines to negotiate new terms before bills become overdue.

What is accounts payable

Accounts payable (AP) is the money your business owes to suppliers for goods or services purchased on credit. It appears as a liability on your balance sheet because it represents an obligation to pay.

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

Accounts payable vs accounts receivable

Accounts payable (AP) and accounts receivable (AR) are opposite sides of the same transaction. Understanding the difference helps you manage both your obligations and your incoming cash.

• Accounts payable: money you owe suppliers for credit purchases
• Accounts receivable: money owed to your business by customers who haven't paid yet

Here's a simple way to remember: if you buy inventory on credit, that's AP. If you invoice a client for work completed, that's AR.

Both appear on your balance sheet but in different places. AP is a liability because you owe money. AR is an asset because you're owed money.

Accounts payable examples

Accounts payable includes any bill your business receives for goods or services purchased on credit. If you've agreed to pay later rather than upfront, it's AP.

Common examples for small businesses include:

• Inventory or raw materials: invoices from suppliers for products you'll sell or use
• Utilities: monthly bills for electricity, internet, or water
• Rent or lease payments: invoices for office space, equipment, or vehicles
• Professional services: fees from accountants, lawyers, or contractors
• Office supplies: purchases from vendors offering payment terms

If a supplier sends you an invoice with a due date rather than requiring immediate payment, that amount is part of your accounts payable until you pay it.

Why accounts payable matters

Good accounts payable management protects your cash flow, your supplier relationships, and your business reputation. Poor AP practices can lead to late fees, strained vendor relationships, and cash flow surprises.

Here's why staying on top of AP matters:

• Supplier relationships: Paying on time keeps vendors happy and willing to offer better terms; research shows that suppliers who receive consistent early payments are 78% more likely to renew contracts.
• Early payment discounts: Many suppliers offer discounts for paying early, and these programs are effective, with one study finding 40% of companies saw an increase in discounts of up to 50%.
• Cash flow visibility: Knowing what you owe and when helps you plan ahead.
• Business reputation: Consistent payments build trust with vendors and creditors, and when early payment options are offered, supplier trust increases by as much as 47%.

A well-organised cash flow management strategy supports a good payment process. When managed through accounting software, it can help you maintain healthy cash reserves.

Accounts payable process steps

The accounts payable process covers every step from ordering goods or services through to making and recording payment. Following a consistent AP workflow helps you avoid errors, capture discounts, and maintain accurate records.

Here are the seven steps in a typical AP cycle.

1. Placing orders

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

Discuss payment terms before approving the expense. Find out when payment will be due and ask about flexibility. Knowing your options upfront helps if cash flow gets tight.

Authorise the expense once price and terms are agreed. If you use purchase orders, assign a purchase order (PO) number at this stage. The supplier should include the PO number on their invoice to help you track the expense.

Confirm where invoices should be sent. Make sure the supplier knows your preferred delivery method to avoid administrative delays.

2. Receiving invoices

Use a dedicated email address for invoices so all your bills land in one place. Digital copies are easier to search, organise, and back up than paper.

Software like Xero can automatically scan emailed bills and create a report of what you owe and when.

Open every bill when it arrives to check for errors or unexpected charges before the due date approaches.

3. Approving (or disputing) invoices

Verify the invoice details match the goods or services you received and confirm the cost is correct. Forward the invoice to partners or project managers for final review if required.

Contact the supplier immediately if you spot errors. These conversations are easier when the bill is fresh in everyone's minds. Waiting until the invoice is overdue makes disputes harder to resolve; being proactive with payment incentives can help, with research showing that such programs result in about 30% fewer disputes.

4. Recording the amount owed

Record the invoice in your accounting system once you've verified it. Note the amount owed and the due date so you can track your obligations.

When you record the expense depends on your accounting method:

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

Learn more about cash vs accrual accounting.

5. Scheduling payment

Schedule payments to balance cash flow and discounts. Ideally, you want to pay when you have enough cash on hand and can still capture early-payment discounts. These goals sometimes compete.

Use your cash flow forecast to plan ahead. If you're using accounting software, scheduled payments flow straight into your forecast. Check whether you'll have the money to pay on time. If not, adjust your plans early.

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

Contact the supplier if you can't meet the deadline. Negotiate a new due date or set up a payment plan before the bill becomes overdue.

Use cash payments when possible to keep interest costs down. If you're using credit regularly, ask a bookkeeper or accountant to review your finance arrangements. They may suggest ways to catch up or refinance at a lower rate.

6. Executing payment

Follow through on scheduled payments to complete this step. The invoice is approved and the date is set. Now you need to make sure the payment actually happens.

To stay on top of payments:

• schedule automated payments through your bank or accounting software
• set aside a dedicated time each week for paying invoices
• use payment reminders in your accounting software

7. Recording payment

Record the payment in your accounting system once the funds leave your account. This closes the AP cycle for that invoice.

If you use cash accounting, enter the expense into your ledger at this point. The paid bill is no longer part of accounts payable and now appears as an expense.

How to automate accounts payable

Accounts payable automation reduces manual work, cuts errors, and gives you real-time visibility into what you owe. Many AP teams report being mired in too much manual data entry and exception processing. Software handles the repetitive tasks so you can focus on running your business.

Here's how Xero automates your AP process:

• Invoice capture: Automatically reads emailed invoices and enters amounts and due dates
• Cash flow forecasting: Shows projected balances on due dates and after payments
• Automatic ledger entries: Records expenses at the right time based on your accounting method

Learn more about Xero's accounts payable automation.

Simplify your accounts payable with Xero

Managing accounts payable can be simple and quick. With Xero's cloud-based accounting software, you can automate invoice capture, track what you owe in real time, and meet every payment deadline.

Whether you're just starting out or growing your business, Xero helps you stay on top of your bills so you can focus on what matters.

Ready to see how Xero can improve your AP process? Get one month free and see how automation helps.

FAQs on accounts payable

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

What does accounts payable do?

Accounts payable manages the process of receiving, verifying, and paying supplier invoices. For small businesses, this might be the owner or one staff member. Larger businesses may have a dedicated AP clerk or team.

What is an example of a payable account?

A payable account is any unpaid invoice for goods or services your business received on credit. Examples include an outstanding supplier invoice, an unpaid utility bill, or a contractor fee due next month.

Is accounts payable an asset or a liability?

Accounts payable is a liability because it represents money your business owes. It appears on the balance sheet under current liabilities.

When should I pay my accounts payable invoices?

Pay invoices on time to maintain supplier relationships and avoid late fees. If early payment discounts are available, paying sooner can save money. Balance timing with your cash flow needs.

How can I pay my accounts payable on time?

Use accounting software with payment reminders, schedule payments in advance, and maintain a calendar of due dates. Automating payments through Xero accounting software helps you meet every deadline.