What are accounts payable: definition, guide and best practices

Blog | December 20, 2021

Reading time: 4 min

What are accounts payable?

Accounts payable (AP) are debts owed to a business or individual, which can be in the form of money, goods or services. "Accounts payable" also refers to the list of vendors who have yet to be paid for goods or services they have provided, and this list includes a wide range of different categories. This term derives from the account maintained by a business that lists these credits and debits and includes adjustments for cash discounts and other transactions.

Below are examples of accounts payable activities:

  • Filing invoices
  • Verifying that invoices are complete and accurate with supporting documentation
  • Approving invoices
  • Paying invoices
  • Reconciling accounts payable records with supplier records

The accounts payable process is primarily concerned with properly recording payments to suppliers per generally accepted accounting principles. Accounts payable are usually paid by the company’s bank account, credit card, debit card or other B2B payment methods.

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What type of account are accounts payable?

Accounts payable is a type of account that deals with debts that have been incurred but not yet paid. Business accounts payable can be divided into two types: salaries and expenses. They are typically in the form of supplier invoices, however, accounts payable can also include bills, invoices and checks. Salaries are payable to employees, while expenses are paid to suppliers and government agencies.

Accounts payable examples include:

  • Utilities
  • Salaries
  • Employee wages
  • The cost of acquiring goods from suppliers to be sold in store
  • Rent for the company’s office space

An organization’s accounting department will send invoices to clients or vendors, then receive payment (cashier’s check, wire transfer, checks, credit cards). Depending on the type, it needs to be categorized as vendor invoices or customer invoices. This way, it can be paid with the corresponding funds.

What is a two-way match in accounts payable?

An accounts payable two-way match refers to when both parties match the amount that they owe each other which completes the transaction. This process is used to record the value of transactions involving more than one account. This process helps accountants find mistakes in the books quicker and with less effort by matching payments to invoices.

Two-way matching is typically done by assigning a code to both the invoice and the payment. The code on the invoice must match that of the payment or the system will reject it.

Typically, there are three methods for implementing a two-way match:

  1. Matching payments to invoices on their face value (cash/check/credit card)
  2. Matching payments to invoices based on their GL account number (e.g., Accounts Receivable, Inventory Control)
  3. Matching payments to invoices based on some other identifier (e.g., customer name, invoice number)

While a two-way match in accounts payable can be complicated, it's worth it as both parties need to ensure that their debts are paid off. When a two-way match exists, it means the accounting of one account impacts the accounting for another account.

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Are accounts payable a liability?

Accounts payable are an essential component of any organization but are also one of the most significant types of liabilities. As accounts payable are an obligation to pay a supplier for goods delivered or work performed on credit terms, they help with the process of managing cash flow. Accounts payable liabilities arise when a company has bought something and has not yet paid the vendor for it, pays too soon, or the company’s accounts payable process fails to meet U.S. GAAP standards.

For example:

  • If a company is paying suppliers too soon, they are running the risk of having to pay penalties. It is important to establish a good payment schedule with all vendors and ensure that payments are made on time.
  • If a company's accounts payable process does not comply with U.S. GAAP accounting standards, then that company will have to report this as an error in the footnotes of their financial statements and provide an explanation for why it happened and how it will be resolved going forward.

Accounts payable can represent a financial risk to a company because any business has to reimburse its suppliers. They might be a minor liability, but they're still a liability. When an account payable becomes too large, it can become difficult for a company to pay its current obligations and lead to bankruptcy or defaulting on loans.

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Optimize the accounts payable process

The accounts payable process is a vital part of any organization’s financial system. It is how companies pay for the goods and services they purchase.

When optimizing the accounts payable process, there are a few simple steps you can follow to ensure that you’re making the most of your AP department:

  • Ensure that no errors are made in accounts payable transactions.
  • Automate many of the tasks that are repetitive and low-level onerous. This frees employees to focus on higher-level tasks that require innovation and creativity that are more difficult to automate.
  • Communicate with suppliers so that they can provide more accurate delivery times and invoicing formats.
  • Share any issues early on or before they arise to shorten payment lag time.

The benefits of AP optimization and AP platform management are numerous: it reduces time spent on processing, increases visibility across the entire process, enhances accountability for all parties involved, and improves accuracy in reporting leading to improved cash flow management.