Accounts payable, explained

The definition

When a supplier delivers and bills you on terms, you record the expense (or the inventory) and record the same amount as a payable. When you pay, the payable goes down and cash goes down. The total of every unpaid supplier bill at a moment in time is your accounts payable balance. "AP" is the shorthand.

Payables cover supplier bills for goods and services. Payroll, taxes and loan payments are owed too, but they are recorded as their own liabilities, not as accounts payable.

Examples of accounts payable

What they share: the goods or the service already arrived, the supplier sent a bill, and you have not paid it yet. A bill you paid on the spot by card never becomes a payable.

• A supplier’s invoice for materials delivered on net-30 terms.
• The monthly invoice from the IT contractor or the cleaning company.
• A freight carrier’s bill for last week’s shipments.
• A software subscription invoiced annually, payable in 30 days.
• The utility bill that arrived on the 5th and is due on the 25th.

Is accounts payable a debit or a credit?

A credit. Accounts payable is a liability, and liabilities grow with credits and shrink with debits, so its normal balance is a credit. Two entries cover its whole life.

When the bill arrives, say $500 of supplies: debit Supplies expense $500, credit Accounts payable $500. The expense is recorded and so is the debt.

When you pay it: debit Accounts payable $500, credit Cash $500. The debt is gone and so is the cash. The expense was already recorded; paying does not record it again.

Accounts payable, notes payable and accrued expenses

All three are money you owe, recorded separately. Accounts payable is a supplier’s bill on ordinary terms, with no interest. Notes payable is a formal written promise to pay, such as a bank loan or a promissory note, usually with interest and a longer term. Accrued expenses are costs you have incurred but not yet been billed for: the wages your team earned this week, or the electricity used before the bill comes. When the bill arrives, the accrual becomes a payable.

Accounts payable versus accounts receivable

They are mirror images. Accounts receivable is what customers owe you, an asset. Accounts payable is what you owe suppliers, a liability. Your receivable is your customer’s payable. A business wants to collect its receivables quickly and pay its payables no sooner than it must, within the terms, because the gap between the two is the cash it has to work with.

The accounts payable process

• Receive the bill and check it against what was ordered and what arrived: the purchase order, the receiving record and the invoice should agree. That is the three-way match.
• Code the bill to the right account, job or department, and route it to whoever approves spend at that level.
• Schedule the payment for the due date, or earlier if the vendor offers an early-payment discount worth taking.
• Run payments in batches, by bank transfer or card, and record each one against its bill so the books and the bank agree.
• Reconcile the vendor statement monthly so nothing is paid twice or missed.

Days payable outstanding: the formula

Days payable outstanding, or DPO, is how long you take to pay suppliers on average: average accounts payable divided by cost of goods sold, times 365. Worked example: average payables of $30,000 against $360,000 of cost of goods sold gives $30,000 divided by $360,000, times 365, which is about 30 days. On net-30 terms that is paying on time; a DPO of 45 on net-30 terms means paying late.

Accounts payable turnover ratio

The AP turnover ratio counts how many times a year you pay off your average payables: supplier purchases divided by average accounts payable. With $360,000 of purchases and $30,000 of average payables, turnover is 12, so you clear your payables about once a month. Divide 365 by the turnover and you get days payable outstanding again: 365 divided by 12 is about 30 days. A falling ratio means you are taking longer to pay; a rising one means you are paying faster.

Keeping payables under control

• Enter every bill the day it arrives, so the payables balance is real and the cash forecast is honest.
• Pay on the due date, not before, unless the discount is worth more than holding the cash.
• Watch for duplicates: the same bill emailed twice, or a statement paid on top of the invoices it lists.
• Check the cash position before every payment run, against the receivables you expect to land first.
• Keep vendor records clean across the books and the payment tool, so one vendor is not two.

The part Liaison does

Liaison reads the bills as they arrive, codes and enters them, checks them against what was ordered, and stages the payment run with the cash position beside it: what is due, what is coming in, and whether Friday is tight. Paying a bill moves money, so the run always waits for your yes. Reconciling the vendor statement and catching the duplicate are routine; it does those on its own.

Works with the tools you already run

Liaison connects to these and more with access you grant, and reads them together with the rest of your business. Each page shows what it reads and does in that tool.

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