Accounts payable (AP) is the amount your business owes suppliers and vendors for goods or services you've bought on credit but haven't paid for yet. It's a short-term liability on your balance sheet, and the name also covers the team or person who pays those bills.
Xero describes AP as your outstanding bills and short-term obligations. In the supplier's books the same amount is accounts receivable, which is why the two always come as a pair; I cover the collecting side in a separate guide to accounts receivable. Xero adds that a larger company usually has a dedicated AP department, while in a small business you might handle it yourself or hand it to a bookkeeper.
What counts as accounts payable
Xero groups the bills that land in AP into six categories: supplier invoices, utility bills, professional service fees, equipment leases, software subscriptions, and rent and facilities. Shopify's list adds licences and contractor invoices. Here's why the most common ones are payables:
| Type of bill | Why it's a payable | Example |
|---|---|---|
| Supplier invoices | Stock or materials bought on credit | 30-day terms |
| Utility bills | Billed after you've used the service | Electricity, internet |
| Professional services | Work done, not yet paid | Accountants, agencies |
| Software subscriptions | Billed in arrears | SaaS tools |
Credited, not debited: how AP is recorded
This is the bit that trips people up. Shopify explains that when a vendor invoice arrives, it's recorded as a credit to accounts payable, and when the bill is paid, AP is debited. The reason is that AP shows liabilities as a positive number, so a new bill increases the balance with a credit and paying it reduces the balance with a debit.
Shopify describes AP as the balance sheet account for a company's short-term debts, including utilities, rents, licences and outstanding vendor or contractor invoices. If you're fuzzy on which report holds which figures, my explainer on the balance sheet and the P&L sorts it out.
Accounts payable vs trade payables
Shopify draws a line that many guides blur. Trade payables are only the amounts you owe in exchange for inventory, such as fabric for a quilt maker or toner. Accounts payable is the bigger bucket: every outstanding obligation to other companies, with trade payables nested inside it.
| Bill | Trade payable? | Accounts payable? |
|---|---|---|
| Fabric for quilts | Yes, it's inventory | Yes |
| Toner | Yes, it's inventory | Yes |
| Utility bill | No | Yes |
| Software subscription | No | Yes |
So when someone quotes a trade payables figure, it'll be smaller than total AP. Make sure you know which one you're looking at before you compare it with anything.
The five-step AP process, with 3-way matching
Xero sets out the process in five stages:
- Capture the invoice. Record the vendor name, invoice number, amount and due date as soon as it arrives.
- Match it to the purchase order and delivery receipt. Xero calls this 3-way matching, and it catches pricing errors, duplicate invoices and unauthorised charges before you pay them.
- Code it to the right expense category, so your reports show where the cash goes.
- Route it for approval under your spending policy.
- Pay on the due date and record the payment, which is the debit to AP that clears the liability.
Shopify says AP automation software digitises invoices, matches them with purchase orders and posts them, which reduces human error. If you're comparing tools, I've reviewed the best accounts payable automation software.
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Why tracking payables protects your cash flow
Shopify gives five reasons to track AP: it helps you manage cash flow, meet vendor deadlines, keep your financial statements accurate, spot unnecessary expenses and plan ahead. Under accrual accounting, it adds, AP works alongside accounts receivable to manage cash flow and show how liquid the business is.
Think of it this way. Your payables tell you what has to leave the bank and when, and your receivables tell you what should come in. Put both into a forecast and the tight weeks show up before they arrive. My list of the best cash flow forecasting software covers tools that do exactly that.
My take on accounts payable
Pay on the due date. Not late, because that costs you goodwill with suppliers, and not early unless there's a discount worth taking. And don't skip the matching step. A duplicate invoice is the cheapest mistake in the business to avoid, because all it takes is checking the bill against the order and the delivery before you pay.
Frequently asked questions
Is accounts payable a debit or a credit?
A credit when the invoice arrives. Shopify explains that AP shows liabilities as a positive number, so a new bill is credited to AP and the account is debited when you pay it.
Is accounts payable an asset or a liability?
A liability. Xero describes it as outstanding bills and short-term obligations, and Shopify lists it on the balance sheet as the company's short-term debts.
What is 3-way matching in accounts payable?
Checking each invoice against the purchase order and the delivery receipt before paying. Xero says it catches pricing errors, duplicate invoices and unauthorised charges.
Are accounts payable and trade payables the same?
No. Shopify says trade payables are only the amounts owed for inventory, while accounts payable covers all outstanding obligations to other companies.
