Guides
Accounts Payable: Definition, Process, and Examples
Accounts payable is the short-term money a business owes its suppliers and vendors for goods or services bought on credit but not yet paid. It sits on the balance sheet as a current liability, usually due within 30 to 90 days. Each unpaid supplier invoice raises the accounts payable balance; each payment lowers it.
Because it is a liability, accounts payable (often shortened to AP) carries a normal credit balance. Recording a new invoice credits accounts payable and debits an expense or asset account. Paying the invoice reverses that credit with a debit and reduces cash. The sections below walk through the full AP process, the three-way match, how AP differs from accounts receivable, the days payable outstanding metric, and the journal entries that record it.
What is accounts payable?
Accounts payable is a current liability account that tracks amounts a company owes to suppliers for purchases made on credit. It appears near the top of the liabilities section on the balance sheet because it is typically settled within a year, often inside a single billing cycle. It excludes payroll, loans, and taxes, which sit in their own accounts.
AP is distinct from the accounts payable department, the team that receives, verifies, and pays vendor invoices. The account measures a balance; the department runs the workflow. Trade payables (routine supplier invoices) make up the bulk of AP for most businesses, while non-trade payables cover items like utilities or one-off services.
AP is a core piece of working capital. Managing it well can preserve cash without harming supplier relationships, a trade-off covered in the working capital guide. Every AP entry flows through the general ledger and lands in the payables balance reported to lenders and investors.
The accounts payable process, step by step
The AP process is the sequence a company follows from receiving a supplier invoice to paying it and recording the transaction. A controlled process typically runs in five steps: receive the invoice, match it against supporting documents, obtain approval, schedule and issue payment, then record the entry. Strong controls at each step reduce duplicate payments and fraud.
The steps below reflect a common purchase-to-pay flow for a company that buys on credit against purchase orders.
- Receive and log the invoice. Capture the vendor, invoice number, amount, date, and payment terms. Logging the invoice number helps flag duplicates before they are paid twice.
- Match the invoice to source documents. Compare the invoice to the purchase order and the receiving report. This is the three-way match described below.
- Route for approval. An authorized approver confirms the goods or services were ordered and received and that the amount is correct. Approval limits often scale with dollar amount.
- Schedule payment. Time the payment to the due date, capturing any early-payment discount (for example, terms of “2/10, net 30” offer a 2% discount if paid within 10 days).
- Pay and record. Issue payment by ACH, check, or card, then post the journal entry that clears the payable and reduces cash.
Each approved invoice becomes a journal entry, the same double-entry mechanics explained in the journal entries guide. Posting AP correctly depends on a clean chart of accounts so payables, expenses, and cash hit the right accounts.
What is the three-way match?
A three-way match is the AP control that compares three documents before an invoice is approved for payment: the purchase order (what was ordered), the receiving report (what was received), and the supplier invoice (what was billed). When quantity, price, and terms agree across all three, the invoice can be paid. Any mismatch is held for review.
The purchase order records the agreed items, quantities, and prices. The receiving report confirms what actually arrived. The invoice states what the vendor is charging. Matching them confirms the company pays only for goods it ordered, received, and agreed to a price on.
| Document | What it answers | Source |
|---|---|---|
| Purchase order (PO) | What did we order, at what price? | Buyer / procurement |
| Receiving report | What did we actually receive? | Receiving / warehouse |
| Supplier invoice | What is the vendor billing us? | Vendor |
A two-way match (PO to invoice only) is sometimes used for services or low-value items where no physical receipt exists. Some companies add a fourth check against an inspection report, making it a four-way match. The three-way match is the standard control for inventory and goods purchases because it can catch overbilling, quantity mismatches, and invoices for undelivered items before cash leaves the business.
Accounts payable vs accounts receivable
Accounts payable is money a company owes to its suppliers; accounts receivable is money customers owe to the company. AP is a current liability and a use of the company’s future cash. Accounts receivable (AR) is a current asset and a source of future cash. One business’s payable is another business’s receivable for the same invoice.
The two accounts sit on opposite sides of the balance sheet and move cash in opposite directions. AP delays cash outflows; AR represents cash inflows still to be collected. Managing both is central to the cash conversion cycle.
| Feature | Accounts payable (AP) | Accounts receivable (AR) |
|---|---|---|
| Definition | Money owed to suppliers | Money owed by customers |
| Balance sheet | Current liability | Current asset |
| Normal balance | Credit | Debit |
| Cash effect | Future cash outflow | Future cash inflow |
| Increases with | Vendor invoice received | Sale made on credit |
| Decreases with | Payment to vendor | Payment from customer |
The mirror-image logic follows the same debit and credit rules covered in the debits and credits guide. Because AP is a liability, it increases with credits and decreases with debits, the opposite of the asset behavior AR follows.
Days payable outstanding (DPO)
Days payable outstanding measures the average number of days a company takes to pay its suppliers. The formula is average accounts payable divided by cost of goods sold, multiplied by the number of days in the period (365 for a year). A higher DPO means the company holds cash longer before paying; a lower DPO means it pays faster.
DPO = (Average Accounts Payable / Cost of Goods Sold) x 365
For example, a company with average accounts payable of $500,000 and annual COGS of $4,000,000 has a DPO of ($500,000 / $4,000,000) x 365, or about 46 days. On average it pays suppliers roughly a month and a half after the cost is incurred.
A high DPO can improve short-term cash flow because the business keeps cash on hand longer, but stretching too far may strain supplier relationships or forfeit early-payment discounts. A low DPO signals prompt payment and may earn discounts, though it can mean the company is not fully using the free financing that trade credit offers. DPO is most useful compared against industry peers and against the company’s own payment terms, and it pairs with the receivables cycle to show total working capital efficiency.
Accounts payable journal entries (with examples)
Accounts payable journal entries follow double-entry rules: recording a supplier invoice credits accounts payable and debits an expense or asset account, while paying the invoice debits accounts payable and credits cash. Because AP is a liability with a normal credit balance, credits raise it and debits reduce it. The two entries below trace one purchase from invoice to payment.
Assume a company buys $5,000 of inventory on credit, then pays the supplier two weeks later.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Purchase | Inventory | $5,000 | |
| Accounts payable | $5,000 | ||
| Payment | Accounts payable | $5,000 | |
| Cash | $5,000 |
At purchase, the inventory (an asset) rises by $5,000 and accounts payable (a liability) rises by $5,000, keeping the accounting equation in balance. At payment, accounts payable falls to zero and cash falls by $5,000. For a service or expense rather than inventory, the debit hits an expense account (for example, Office Supplies Expense) instead of Inventory, but the credit to accounts payable is the same.
If the company took a 2% early-payment discount on the $5,000, it would credit cash for $4,900, debit accounts payable for $5,000, and credit an account such as Purchase Discounts for $100. These postings feed the payables balance and, ultimately, the operating section of the cash flow statement, where a rising AP balance is a source of cash.
Frequently asked questions
Is accounts payable a debit or a credit?
Accounts payable normally carries a credit balance because it is a liability. It increases with a credit when a supplier invoice is recorded and decreases with a debit when the invoice is paid. So a new payable is a credit entry, and paying it off is a debit entry that returns the balance toward zero.
Is accounts payable an asset or a liability?
Accounts payable is a liability, specifically a current liability, because it represents money the company owes and expects to pay within a year. It appears in the liabilities section of the balance sheet. It is not an asset; the mirror-image asset is accounts receivable, which is money owed to the company by its customers.
What is the difference between accounts payable and accounts receivable?
Accounts payable is money a company owes suppliers (a liability and future cash outflow), while accounts receivable is money customers owe the company (an asset and future cash inflow). They sit on opposite sides of the balance sheet. The same invoice is a payable for the buyer and a receivable for the seller.
What is a three-way match in accounts payable?
A three-way match compares the purchase order, the receiving report, and the supplier invoice before approving payment. When the quantity, price, and terms agree across all three documents, the invoice is cleared to pay. Mismatches are held for review. The control helps prevent overbilling, duplicate payments, and paying for goods that were never received.
How do you calculate days payable outstanding?
Days payable outstanding equals average accounts payable divided by cost of goods sold, multiplied by the days in the period (365 for a year). For example, average AP of $500,000 and COGS of $4,000,000 gives a DPO of about 46 days. A higher figure means the company takes longer to pay suppliers.
What is included in accounts payable?
Accounts payable includes short-term amounts owed to suppliers and vendors for goods and services purchased on credit, mainly routine trade payables plus non-trade items like utilities. It generally excludes payroll, income taxes, loans, and interest, which are tracked in separate liability accounts. Only obligations expected to be settled within the normal credit cycle belong here.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.