Accounting and bookkeeping
Accounts payable (AP)
Accounts payable is the total amount of short-term debt your business owes to suppliers and vendors for goods or services that you have received but have not yet paid for.
What is Accounts payable?
Accounts payable is a liability account on your balance sheet representing the money you owe to suppliers or creditors. When you buy inventory, supplies, or services on credit, the billed amount becomes part of your accounts payable until you settle the invoice. It is considered a current liability because you are typically expected to pay these debts within a year, often in 30, 60, or 90 days. Keeping accurate records of what you owe ensures you maintain good relationships with your vendors and avoid late payment penalties. If your accounts payable balance increases, it means you are buying more on credit than you are paying off. When it decreases, you are paying debts faster than you are incurring new ones. Managing this balance carefully helps you control your cash flow.
How Accounts payable works
The accounts payable process begins when you issue a purchase order to a supplier for goods or services. Once the supplier delivers the items, they send you an invoice detailing the amount due and the payment terms. You then review the invoice to verify it matches the purchase order and the delivery note. This verification step prevents overpayment or fraud. After approval, you record the invoice in your accounting system, which increases your accounts payable balance. Finally, you schedule and make the payment before the due date. Once the payment clears, you record the transaction to decrease your accounts payable balance and reduce your cash account.
- Receiving an invoice from your supplier for goods or services provided.
- Verifying the invoice details against the original purchase order and delivery note.
- Recording the approved invoice in your general ledger as a current liability.
- Scheduling the payment according to the agreed credit terms to avoid penalties.
- Disbursing the funds and updating your records to reduce the liability balance.
Worked example
Al Noor Trading starts the month with a zero balance in accounts payable. On the fifth of the month, the business buys 2,000 Omani Rials of inventory on credit from a local supplier. This increases their accounts payable to 2,000 Omani Rials. On the fifteenth, they purchase 500 Omani Rials of office supplies, also on credit, bringing the total accounts payable to 2,500 Omani Rials. On the twentieth, Al Noor Trading pays 1,200 Omani Rials to the first supplier. To find the new balance, subtract the 1,200 payment from the 2,500 total liability. The remaining accounts payable balance at the end of the month is 1,300 Omani Rials.
Why it matters for your business
Tracking accounts payable is essential for protecting your cash flow and maintaining your business reputation. If you lose track of what you owe, you might miss due dates, incur late fees, and damage relationships with crucial suppliers. Suppliers may respond by reducing your credit limit or refusing to deliver goods until past debts are cleared, which can halt your operations. Conversely, paying too early might leave you short on cash for payroll or rent. Using software like Paper & Pen, which posts journal entries and supports many currencies, helps you record these liabilities accurately to protect your working capital.
See also
Questions
Common questions
Is accounts payable an expense or a liability?
What is the difference between accounts payable and accounts receivable?
Related terms
- Accounts receivable Accounts receivable represents the total amount of money owed to a business by its customers for goods or services that have been delivered but not yet paid for.
- General ledger A general ledger is the master accounting record of a business, containing all financial transactions categorised by account to track assets, liabilities, equity, revenue and expenses.
- Purchase order A purchase order is a legally binding document issued by a buyer to a supplier, authorising a purchase and detailing the exact items, quantities and agreed prices.
- Payment terms Payment terms are the specific conditions agreed upon between a seller and a buyer that dictate when and how an invoice must be settled.
- Working capital Working capital is the financial metric representing the difference between a business's current assets and its current liabilities, indicating its short-term liquidity and operational efficiency.
- Accrual accounting Accrual accounting is a financial method where you record revenue when a sale occurs and expenses when you receive goods or services, regardless of when the actual cash changes hands.