What is Accounts Payable?
Accounts payable (AP) is the money a business owes to its suppliers for goods or services received but not yet paid for.
Accounts payable (AP) represents money your business owes to suppliers, contractors, and other creditors for goods or services you have received but not yet paid for. It is recorded as a current liability on your balance sheet.
- **Accounts payable vs accounts receivable:**
- Accounts Payable (AP): = money you **owe to others** (your bills)
- Accounts Receivable (AR): = money **owed to you** (your invoices)
They are mirror images — your AP is your supplier's AR.
The AP process: 1. You receive goods or services from a supplier 2. The supplier sends you an invoice 3. You verify the invoice against the purchase order and delivery note 4. You approve the invoice for payment (sometimes called "three-way matching") 5. You pay the invoice according to the agreed payment terms 6. You record the payment in your accounts
- **Why AP management matters:**
- Cash flow control: — paying too early reduces your available cash; paying too late damages supplier relationships
- Supplier relationships: — consistent late payment can lead to suppliers demanding upfront payment or refusing to supply
- Credit rating: — poor AP management can affect your business credit score
- Discount capture: — some suppliers offer early payment discounts (e.g. 2% for payment within 10 days)
AP best practices: - Record invoices as soon as they arrive - Set up a regular payment run (e.g. weekly or fortnightly) - Take advantage of early payment discounts when cash allows - Reconcile your AP ledger with supplier statements regularly - Keep a clear audit trail of approvals and payments
Examples
A business has £15,000 in accounts payable — bills from three suppliers due within 30 days
An office manager reconciles the AP ledger with supplier statements at month-end
A company takes a 2% early payment discount by paying a £5,000 invoice within 10 days, saving £100
Related Terms
Accounts Receivable
Accounts receivable (AR) is the money owed to a business by its customers for goods or services delivered but not yet paid for.
Purchase Order
A purchase order (PO) is a commercial document issued by a buyer to a seller, authorizing a purchase and specifying the items, quantities, and agreed prices.
Purchase Ledger
A purchase ledger (also called a bought ledger or creditors ledger) is the accounting record of all purchases made on credit and payments made to suppliers.
Cash Flow
Cash flow is the movement of money into and out of a business over a given period, determining whether the business has enough cash to meet its obligations.