Accounts Payable: a Beginner’s Guide

Accounts payable (AP) refers to money that is owed by a business to its suppliers, specifically, accounts in a business’s financial record that represents its responsibility to pay short-term debts for things like goods and services. In many cases these will appear in the form of invoices owed to suppliers, for example.

Within an organisation, the AP department usually takes care of such records and the payments associated with them. In this respect, AP departments, often within a larger finance department, are in charge of processing invoices, paying invoices, and keeping track of money owed to suppliers.

What is Accounts Payable?

In short, accounts payable refers to the current financial liability a business has accrued as a result of receiving goods or services for which it has yet to pay. At the same time, accounts payable also refers to the department within an organisation that handles such payments, and sometimes the person or people who do the job of dealing with accounts payable in an organisation.

Accounts payable typically appears as a line item in the liabilities section of a business’s financial balance sheet. Unlike accounts receivable, which represents money owed to a business by its customers, accounts payable is a record of what is owed to organisations that sell a product or service to a business.

Importance of Accounts Payable in Financial Management

One of the key reasons why accounts payable is such an important part of a business’s financial balance sheet is because it shows a significant portion of an organisation’s liabilities. For that reason, it can be a key indicator of the health of a business’s cash flow, especially when inventory is involved.

If the accounts payable amount increases over time, it could mean that the business is purchasing more products or services on credit than it should, instead of paying cash or paying suppliers within a reasonable amount of time. Conversely, if AP decreases over time, it may mean that the business is paying its suppliers faster.

Keeping close track of AP turnover is essential in situations where fees are applied by suppliers in the event of the late payment of invoices. If accounts payable departments find themselves habitually paying invoices later, not only can it lead to unnecessary fees, but it can also indicate that the business may have cash flow problems.

For these reasons, accounts payable is a useful tool in broader financial management, since AP teams provide financial records that are used to help businesses track cash flow and financial health. In fact, businesses can use accounts payable to actively manage cash flow. For instance, extending the time taken to pay outstanding accounts can increase cash reserves.

At the heart of using accounts payable to determine the financial health of a business in terms of cash flow is the accounts payable turnover ratio. This is a liquidity measure which helps to describe how fast or slow a business is paying its bills. A high AP turnover ratio indicates that the business is paying its invoices quickly. Conversely a lower turnover means payments are being made more slowly.

The Accounts Payable Process

Once upon a time, accounts payable processes were largely manual. But this is changing as business financial management software becomes more widely accessible, even if organisations at the smaller end of the market may still rely on manual processes. However, as AP volume increases, it makes more sense to introduce software-based automation, making the process more efficient and less error-prone.

A typical AP process includes:

1. Creating a purchase order: In general, the AP process begins with the creation of a purchase order upon procurement of a product or service. This typically results in an invoice from the supplier. The AP department checks the invoice to make sure that the details are correct and in order. This is important, as such attention to detail can help to spot and weed out accidental errors on the supplier side as well as intentional fraud.
2. Receiving and checking an invoice: Once the invoice has been received and checked, including comparing it against the original purchase order and the receipt of delivery of goods or services, the AP team will be in a position to record the invoice in the company’s accounting system, assigning the relevant ledger codes to include it in the financial records of the organisation.
3. Authorising payment: At that point, payment can be authorised, taking into account the appropriate payment terms.
4. Processing payment and reconciling: Finally, the payment is processed, and the AP team reconciles it with the invoice, updating the company’s accounting records to match.

Differences Between Accounts Payable and Accounts Receivable

Accounts payable usually represents a short-term debt and liability on a balance sheet in instances where money is owed to vendors or suppliers, either on credit or within the specified timeframe of payment terms for a product or service. Accounts receivable, on the other hand, relates to the money due the company from its creditors for goods and services it has sold. These may include customers and partners.

In that sense, accounts receivable represents an asset, whereas accounts payable represents a liability. These figures are typically represented as such in the organisation’s financial balance sheet. Accounts receivable line items are generally listed as current short-term assets, whereas accounts payable are considered current short-term liabilities.

This means that, while accounts payable team members track what the business owes to its vendors or suppliers and have control over authorising payments, accounts receivable operatives oversee and manage what is owed to the business by its customers, usually by tracking outstanding invoices that have been issued by the organisation to others.

Accounts Payable Examples

Beyond line items such as payroll, most business expenses can be deemed accounts payable. Inventory is a notable accounts payable category, as is foodstuffs for restaurants—anything for which a good or service has been rendered. But even items like rent and insurance can also be thought of as accounts payable, since they usually involve an invoice that needs to be paid.

Some typical examples of accounts payable may include:

• Business purchases: Items such as office supplies or furniture would result in an invoice that would end up being handled by the accounts payable team.
• Supplier purchases: As discussed previously, raw materials, products or services bought, often on credit, from suppliers are considered accounts payable.
• Subscription payments: Subscriptions for business-related services or software are considered accounts payable, since they represent money owed to another organisation.
• Instalment payments: Like subscriptions, instalment payments are treated as accounts payable, as they are short-term debt items that need to be paid to another party.
• Utility payments: Like office rent, utility bills are generally treated as accounts payable and, as such, are handled by the AP team.

The Role of Automation in Accounts Payable

Software-based automation can be used to streamline the more repetitive or manual aspects of the processes within any workflow, and accounts payable is no exception. Indeed, the AP process in many businesses has historically been largely manual, and it still is in many smaller companies.

However, any organisation that deals with large volumes of invoices or payments is well-positioned to make use of automation to make its AP processes more efficient and time-effective while also cutting down on potential human-based errors, which can help to ease associated problems further down the track, especially when supplier payments are involved.

Not only does the automation of financial processes save time, money, and resources, it also helps to ensure policies are enforced according to both organisational and regulatory mandates, as well as simplifying the overall workflows of the AP team more generally.

If businesses are still using Excel spreadsheets or paper-based processes to identify, track, and pay accounts payable, it’s probably time for them to upgrade to automated processes making use of software designed to help manage financial processes, including the AP activities of a business.

Benefits of Using Accounts Payable Software

Automation tools are becoming increasingly common in business management and financial management software solutions as built-in features. This means the ability for organisations to make use of automation is becoming easier all the time, while less effort is involved in embedding it into existing workflows and bringing new levels of efficiency into financial processes.

Some things to consider when identifying a software solution and the associated automation features needed to streamline AP activities include how well it can process and exchange data from other systems across the organisation. Such integration should extend to systems within partner and supplier networks where applicable, for greater automation and streamlining potential from end-to-end, all the way up and down the supply chain.

With the right software in place, businesses can dramatically transform their internal financial processes, including accounts payable, making them faster, more streamlined, less prone to errors, and easier to track. Using software to handle AP processes also helps to give businesses more visibility over accounts and cash flow, sometimes even in real time, helping them to more tightly control costs or expenses in an ongoing capacity.

Streamline your AP Processes with NetSuite

Businesses should look to streamline processes related to financial accounts, including accounts payable. With NetSuite ERP, businesses can simplify and automate their entire accounts payable process by replacing paper and manual invoice keying, matching, and payment processing with an automated digital alternative.

For instance, NetSuite’s accounts payable tools can automate the review, approval, and payment of supplier invoices, giving organisations greater control over the full procure-to-pay process. At the same time, NetSuite helps to maintain detailed vendor records, create and manage purchase requests, and improve data accuracy by automatically matching invoices to the correct vendor and purchase order.

With automated journal entries eliminating the need to manually enter debits and credits, AP teams can save time while also ensuring payments are recorded accurately. NetSuite accounts payable automation provides a fast and secure way to process invoices and pay bills directly through NetSuite.

Learn more about how NetSuite helps finance teams with their accounts payable processes.

Accounts Payable FAQs

What is meant by accounts payable?

Accounts payable (AP) refers to money that is owed by a business to another business, typically a supplier or partner that has provided some form of goods or service to the organisation, either on a one-off or ongoing basis.

What is an accounts payable role?

An accounts payable role relates to any position within the organisation that deals with handling accounts payable processes, such as receiving invoices, matching invoices with purchase orders, and paying suppliers.

What is an example of an account payable?

Line items that can be considered accounts payable include goods, such as:

• Inventory
• raw materials or foodstuffs
• recurring or ongoing payments such as utilities or rent, subscriptions, instalments
• expenses such as office supplies.

What is the difference between accounts payable and receivables?

Accounts payable typically represents short-term debt and liability on the balance sheet, meaning money that the business owes another business, often a supplier.

By contrast, accounts receivable refers to money that is owed to the business by its customers or partners. In this way, accounts receivable is expressed as an asset on the balance sheet, while AP is a liability, if a short-term one.