Accounts payable (AP)
The money a business owes its suppliers for goods and services it has received but not yet paid for.
In short
- AP is a current liability on the balance sheet.
- It is also the name of the team and process that receive, approve and pay supplier invoices.
- Paying too early wastes cash. Paying late damages supplier relationships and can cost fees.
Accounts payable, or AP, has two meanings. On the balance sheet, it is the total owed to suppliers for purchases made on credit: invoices received and approved but not yet paid. In a business, it is also the function that handles those invoices, from receipt to payment.
The AP process
- An invoice arrives by email, mail, a supplier portal or e-invoicing network.
- It is captured, and its supplier, amounts and tax are recorded.
- It is checked against the purchase order and receipt where there is one, and coded to the right accounts.
- It is approved by the person responsible for the spend.
- It is scheduled and paid on or before its due date.
Managing AP well
AP sits at the point where controls matter most, because it is where money actually leaves the business. It is where duplicate invoices, fake suppliers and changed bank details get caught, or don't. It also affects cash: paying on the due date rather than the day an invoice arrives keeps money in the business longer, while taking early payment discounts can be worth more than holding the cash.
At month end, AP also feeds the close. Invoices received but not yet entered, and goods received without an invoice, have to be accrued so expenses land in the right period.
Worked example
AP on one balance sheet
On March 31, a distributor has 146 approved supplier invoices waiting for payment, totalling $412,800. That amount appears as accounts payable under current liabilities. Another $38,500 of goods have arrived without an invoice yet; those are accrued separately so March expenses are complete.