What Is Accounts Payable? Definition, Examples & Processes

Karina Corona

Companies purchase items on credit every day. Businesses don’t always have cash on hand to pay for something upfront, so they track their invoices and eventually pay off expenses when they’ve generated enough capital from selling their goods and services. This sounds like a great solution in theory, but the act of reviewing invoices, purchase orders, contracts, and other agreements requires enormous attention to detail.

This is where accounts payable comes in. The effectiveness of your accounts payable department can affect:

  • Your company’s cash position.
  • How your company interacts with suppliers.
  • Your company’s credit rating.

Consequently, your accounts payable team and the process they use needs to be a well-oiled machine. In this article, you’ll learn more about what accounts payable does, how it differs from accounts receivable, and how to make your AP process as efficient as it can be.

Build a better accounts payable process with the
 Definitive Guide to Workflow Management
Download guide

What is accounts payable?

A strong accounts payable (AP) team is an invaluable resource for any organization. The AP team is responsible for tracking liabilities and paying a company’s bills. This work directly influences a company’s financial projections and quarterly financial statements.

Members of the AP team must be extremely detail-oriented since any AP mistake can cause a cascade of issues. For instance, omitting a vendor invoice or recording an expense late can cause missing liabilities on the company’s balance sheet and income statement. Conversely, an expense accidentally recorded twice can cause liabilities and expenses to be overstated.

Without an efficient, well-managed accounts payable process, company leaders and stockholders will be ill-informed as to a company’s performance and financial position.

Accounts payable vs. accounts receivable

Accounts payable and accounts receivable often get confused. While the two disciplines are similar and both fall under the finance umbrella, they have distinct differences. Accounts receivable refers to the amounts owed to a company by its customers. Accounts payable, on the other hand, refers to the amounts that a company owes to its vendors.

Payables are classified as current liability, whereas receivables are classified as a current asset. As such, receivables can be counterbalanced by an allowance for doubtful accounts, while payables do not have this offset. Another difference between payables and receivables is that payables are often used to create products. Companies need to buy materials (payables) in order to create the goods that they sell (receivables).

Ultimately, both accounts receivable and accounts payable are used for liquidity analysis. Healthy companies will have sufficient funds coming in from receivables to pay for their outstanding payables.

What is the accounts payable process?

The accounts payable process is the method by which a company pays its bills (outside of payroll). As mentioned, this function is extremely vital to an organization because it impacts cash flow, financial statements, vendor relationships, and credit scores. The AP process may be performed by a single bookkeeper in a small business, a small AP staff in a medium-sized company, or an entire accounts payable department in a large organization.

Before an invoice is registered in an accounting system, it must display what the company ordered and what the company received, all with the correct units, calculations, and totals. Usually AP processes have internal controls in order to: avoid paying inaccurate, fraudulent invoices, prevent double or overpayment, and take all invoices into account.

🔔 Check out how to manage your accounts payable process with Pipefy

Accounts payable process steps

There are a number of necessary steps in this process, including creating purchase orders, receiving reports and invoices, checking records for accuracy, making payments, and updating records.

To understand how the process works, here’s a breakdown of each step:

1. Complete a purchase order

Preparing and distributing purchase orders is the first step in the AP process. A purchase order (PO) documents what a company has ordered from a vendor. POs contain: the PO number, the date the PO was prepared, the company name, the vendor name and contact information, a description of what is being purchased (including quantity and shipping method), and the date the purchaser expects to receive the purchased items.

Typically, POs are disseminated to several people to ensure that the information on them is correct. POs go to: the person preparing the PO, the individual requesting a PO, the vendor, the AP department, and the receiving department.

2. Process a receiving report

Once goods or services have been received, accounts payable needs to track the items in the form of a receiving report. This report details when goods were received as well as their quantity and quality. The receiving report is then compared to information on the purchase order, and, eventually, the vendor invoice.

3. Receive and process the supplier invoice

Vendors send invoices to companies that receive goods or services on credit. As soon as the bill is received, AP verifies that the invoice matches the receiving report and purchase order. After AP approves the invoice, the amount on the bill will be credited to the AP account and debited to another account as an expense or asset.

4. Check accuracy using a three-way match

A “three-way match” refers to the AP system of validating vendor invoices. The accounts payable team attempts to match the company purchase order, receiving report, and vendor invoice. If all three documents match, the invoice will be entered into the AP account and be scheduled for payment.

5. Use vouchers, if applicable

Besides the three-way match, some businesses use a voucher to certify the completeness of the AP process. Vouchers are a cover sheet for supporting documents (PO, receiving report, invoice), and note various approvals, account numbers, and other relevant information. When an invoice is paid, the voucher, a copy of the corresponding check, and all the attachments are stored in a file. All documents will be marked with a “PAID” stamp to guarantee there are no duplicate payments.

6. Make timely payment

Payments must be processed on or before their due date, as predetermined by the vendor and purchasing company. Vendors often prefer certain payment methods, sometimes to the point of providing discounts. The AP team must pay attention to these offers and pay vendors according to the way they prefer and expect.

Paying vendors on time is essential to preserving good relationships. When vendors know they’ll be paid on time, they are more likely to recommend the company to other businesses. Furthermore, vendors paid in a timely manner may even be incentivized to produce better materials or services.

7. Update records

Once payments are made, AP will close the vendor ledger account, thereby reducing the liability created when the goods or services were purchased. At this point, the amount shown in the system as “payable” will no longer be considered a liability. The AP department then updates all records associated with this payment in its accounting system.

Copies of the final check, vendor bank account details, payment vouchers or three-way matches, original invoices, purchase orders, and receiving requests are all approved and stored in the accounting books or software. While this may seem like an overburdened process, these materials must be available for review during month-end accounting activities and for any payment disputes that may arise in the future.

Check out Pipefy’s accounts payable template to jumpstart your process improvementRun a streamline AP process with Pipefy

Tips & tricks to managing the accounts payable process

As you can see, there are many manual steps in the accounts payable process. To mitigate potential human errors, many companies step up their game by implementing AP best practices. A few of those activities are:

  • Setting up payment reminders. Reminders help AP teams always pay vendors on time, which, in turn, supports vendor relationships.

  • Creating traceable processes. Traceability allows AP and any other business sectors to review and substantiate all payments for audit purposes.

  • Maintaining vendor relationships with automation. AP process automation can institute each of these best practices, plus it eliminates the need for paper and lessens the time and cost of AP processing. What is more, AP software often integrates directly with organizations’ ERPs. This makes the task of producing financial statements infinitely simpler.

3 key benefits of an organized process

An organized accounts payable process makes for a more accurate process. That’s because paying bills has a number of lasting effects on company credit, vendor relationships, and even sales performance. When AP pays invoices on time, suppliers will fulfill orders on time, and a company’s products will be created and sold on time.

In addition to the lasting effects of paying invoices on time, there are additional benefits to running an organized accounts payable process, including:

1. Time optimization

When you organize your AP process, all accounts are sorted by the payment date, so all you have to do is log in and pay. In doing so, you reduce the risk of error and time spent monitoring payments and processes, allowing you to focus on more strategic tasks.

Considering that most payments these days can be made electronically, your process can be even more streamlined. By integrating your process with existing financial systems, your AP process can be fully automated. Once your new AP process is adopted, the team can easily monitor, track, pay and report on all outbound payments.

2. More opportunities to save money

Considering that most payments these days can be made electronically, your process can be even more streamlined. By integrating your process with existing financial systems, your AP process can be fully automated. Once your new AP process is adopted, the team can easily monitor, track, pay and report on all outbound payments.

Tracking your AP metrics also presents an opportunity for dollars saved. By analyzing your processes you can evaluate which vendors are services are critical to your business, assess which are the easiest to work with, and where you might be able to reduce costs.

3. Possibility of renegotiation

Sometimes there are circumstances in which you might not be able to pay for a bill or service on time. If that is the case, contact your supplier in advance and try to renegotiate the due date. This can preserve your relationship and could possibly save you some money with lower interest rates. But, without a clear line of sight into your payment process, you’ll miss these opportunities.

Overall, air-tight AP processes ensure that a company: does not incur late penalties or overpay customers, maintains consistent cash flow, and provides stakeholders an accurate picture of a company’s financial health.

The benefit of automating the accounts payable process

Any high-functioning business needs an AP team in tip-top shape. Your bills need to be scrutinized for accuracy and paid on time. The results of AP work need to be reflected appropriately in your company’s overall financial statements. This process normally requires a number of manual, tedious steps, so the power of automating this process should not be overlooked.

Automating the AP process will save your accounting team ample time, and will save your business money and clout. Software like Pipefy provides modern, plug-and-play AP workflow templates that can be customized specifically for any organization. With these templates, your AP team will stop missing payment deadlines, build trust with suppliers, and make payment requests simple for your employees.

Find out why companies choose Pipefy to revolutionize their accounts payable processWhy Pipefy
Written by
Karina Corona
Jr. content writer @ Pipefy. I write about process optimization, digital tools, and how teams can leverage automation to free themselves from hours of boring, repetitive work.

Receive our latest posts in your inbox