Accounts Payable Definition and Example
In accounting, accounts payable is recorded as a liability. AP represents the money you ow to your service providers. Learn more about its meaning, examples, and AP automation.
What is Accounts Payable?
Accounts payable (AP) is the amount of money you (as a business) owe to your suppliers, vendors, or service providers.
These appear as short-term liabilities in the balance sheet and must usually be settled within 30 to 90 days.
Accounts payable involves receiving supplier invoices, verifying them against purchase orders and delivery receipts (a process known as three-way matching), and scheduling payments according to agreed terms.
This workflow guarantees that you pay only for valid and accurate invoices, helping prevent overpayments or duplicate transactions.
A well-managed AP system helps you keep vendor trust. By balancing payment timing with available cash, you can improve liquidity without harming supplier relationships.
Why It Matters
The AP process protects your financial health and operational stability.
How you manage your payables irectly affects your cash flow, reputation, and negotiations with suppliers. A correct AP system gives you full control over when and how payments are made, which can make the difference between healthy liquidity and financial strain.
Accounts payable represents one of the largest short-term obligations on your company’s balance sheet. If payables are not managed carefully, outstanding bills can accumulate and reduce the amount of cash available for other strategic activities such as investments, payroll, or expansion.
Additionally, vendors and service providers rely on predictable payment behavior.
Consistently paying invoices on time helps build trust and reliability within the supplier network, which in turn strengthens long-term business relationships.
AP Example
Your CPA firm hires an external IT service provider to upgrade your accounting software and cloud infrastructure, with a total project cost of $10,000.
The vendor sends you an invoice payable within 60 days.
Until your firm settles this invoice, the $10,000 is recorded as part of accounts payable on your balance sheet, representing money owed for services already received.
Once the payment is made, the liability is cleared, and the cash balance is reduced accordingly.
Accounts Payable vs Accounts Receivable
As mentioned, accounts payable is the money you owe to your vendors or service providers, it is recorded as liability.
On the other hand, accounts receivable is the money your clients or customers owe you for your service or product and it is recorded as an asset.
Automated AP
Accounting software such as Eleven, can automate AP and AR.
These tools use AI and OCR to capture invoice data automatically, route approvals, and reconcile transactions with bank records in real time.
Accounting software can:
- Digitize invoices
- Prevent duplicate or fraudulent payments
- Provide real-time reporting
- Speed up approval workflows
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