Accounts payable (AP) represents the short-term obligations your business owes to suppliers for goods or services you’ve already received. It appears under current liabilities on the balance sheet and directly affects your cash flow, vendor relationships, and overall financial health. Understanding how AP is recorded and managed helps you keep clean books and avoid bottlenecks in your payment process.

What is accounts payable?

Accounts payable is the amount you owe suppliers and vendors for goods or services you’ve already received but haven’t paid for yet. These short-term obligations arise when you purchase items on credit under terms such as net 30.

AP differs from other payables such as notes payable, which involve formal written agreements and often include interest. While AP covers routine purchases from suppliers, notes payable usually represent larger financing arrangements with structured repayment schedules.

Most accounts payable come due within 30 to 90 days, which is why they appear in the current liabilities section of your balance sheet. The specific payment window depends on the terms you’ve negotiated with each vendor.

Accounts payable vs. trade payables

Trade payables are a subset of accounts payable that represent amounts owed specifically for inventory or raw materials used in production. They reflect what you owe suppliers for goods you’ll resell or use to make other products.

Accounts payable is broader. It includes trade payables plus short-term obligations for services such as consulting, utilities, rent, and software. For example, AP for a manufacturing business may include steel from suppliers, legal fees, electricity bills, and subscription costs.

Where does accounts payable go on a balance sheet?

Accounts payable appears in the current liabilities section of your balance sheet, where it shows what you owe suppliers in the short term. This section sits on the right side of the balance sheet and typically lists liabilities by how soon they’re due or by size.

You’ll usually see AP near the top of current liabilities, alongside short-term debt and before items like accrued expenses or deferred revenue. Placement can vary slightly based on company accounting practices.

AP fits directly into the accounting equation as part of liabilities:

Assets = Liabilities + Equity

When you receive goods or services on credit, your assets increase and your liabilities increase by the same amount, keeping the equation balanced.

Understanding current liabilities

Current liabilities include obligations your business must pay within one year or within one operating cycle. These short-term debts affect your working capital and cash flow. Common current liabilities that appear alongside accounts payable include:

• Short-term debt: Bank loans or credit lines due within 12 months
• Accrued expenses: Earned wages, taxes, or interest not yet paid
• Deferred revenue: Payments received before delivering goods or services
• Current portion of long-term debt: The next 12 months of payments on multi-year loans

Accounts payable qualifies as a current liability because suppliers typically expect payment within 30 to 90 days. This short window means AP directly influences your near-term cash needs and requires active management.

Example of accounts payable on a balance sheet

Accounts payable is a short-term liability, which means it appears near the top of the “Liabilities & Owner’s Equity” section of your balance sheet:

In the example above, the “Current Liabilities” section contains accounts payable along with other liabilities that will come due within one year, such as short-term loans and the current portion of long-term loans. You won’t see AP in the long-term liabilities section because your AP account generally only tracks short-term obligations, what you owe within the next few weeks or months.

How to record an accounts payable journal entry

Recording accounts payable involves two journal entries: one when you receive the invoice and another when you pay it. Each entry updates both your expense or asset accounts and your AP balance so your books stay accurate.

Initial purchase entry

When you receive goods or services on credit, you debit the appropriate expense or asset account to reflect what you received. At the same time, you credit accounts payable to record the amount you owe. Using a $5,000 office supply purchase as an example:

This entry increases your assets and increases your liabilities by the same amount, keeping your balance sheet aligned with the accounting equation.

Payment entry

When you pay the invoice, you debit accounts payable to reduce the liability and credit cash to show the payment. Using the same $5,000 example:

This clears the liability from your balance sheet and reduces your cash balance by the amount paid.

Calculating and analyzing accounts payable

Your total accounts payable equals the sum of all unpaid vendor balances in your subsidiary ledger. This detailed ledger tracks what you owe each supplier, while the general ledger shows the combined total that appears on your balance sheet.

The AP turnover ratio measures how quickly you pay suppliers. Calculate it by dividing your cost of goods sold by average accounts payable. A higher ratio means you’re paying vendors faster, while a lower ratio suggests you're taking longer to settle invoices.

Companies often aim for a balance between maintaining good vendor terms and preserving cash flow. Most businesses fall between 30–45 days of DPO and 6–12 annual AP turns, depending on their industry and purchasing cycle.

Key metrics and ratios

Days payable outstanding (DPO) shows the average number of days your company takes to pay invoices. Calculate it using:

DPO = (Accounts payable / Cost of goods sold) * Number of days

For example:

DPO = ($61,500 / $500,000) * 365 = 45

The AP turnover ratio formula is:

AP turnover ratio = Cost of goods sold / Average accounts payable

Using the same numbers:

AP turnover ratio = $500,000 / $50,000 = 10

These metrics show how effectively you manage cash flow and vendor relationships. Very high turnover might mean you're paying too quickly and missing opportunities to use cash elsewhere. Very low turnover could signal cash flow issues or risk damaging supplier relationships through late payments.

Accounts payable automation and management

Technology and strong processes help you manage accounts payable more efficiently while reducing manual work and errors. Automating key steps—from capturing invoices to routing approvals and scheduling payments—improves accuracy and visibility across your entire AP workflow.

Benefits of accounts payable automation

Automation delivers measurable improvements across processing speed, accuracy, and control. According to a 2024 study by Ardent Partners, companies using AP automation spend $2.78 per invoice processed compared to $12.88 for companies relying on manual methods. Additional benefits include:

• Reduced processing time: Automated data capture, routing, and approvals shorten processing from days to hours.
• Fewer errors and duplicate payments: Systems flag duplicates, unusual amounts, and missing fields before payment.
• Better visibility and cash flow control: Dashboards show outstanding invoices, upcoming due dates, spending patterns, and vendor history.
• Improved vendor relationships: Consistent, on-time payments can lead to better terms, early-payment discounts, or priority support.

These improvements free your finance team to focus on analysis instead of manual data entry.

Best practices for AP management

Strong processes help you maintain accurate records and optimize payment timing, whether or not you use automation:

• Establish clear approval workflows: Define approvers by dollar amount and route invoices automatically to avoid bottlenecks.
• Take advantage of early-payment discounts: Terms such as 2/10 net 30 offer a 2% discount for paying within 10 days, which is equivalent to a 36% annual return on cash.
• Maintain accurate vendor records: Keep contact details, tax IDs, payment terms, and W-9 forms current to prevent payment delays.
• Regular reconciliation: Match the AP subsidiary ledger to vendor statements and the general ledger to catch discrepancies early.

Essential AP controls

Strong controls help prevent errors, fraud, and duplicate payments. One of the most important is 3-way matching, which compares the purchase order, receiving report, and vendor invoice before payment so you only pay for goods actually ordered and received.

Automated systems also flag duplicate invoice numbers, track changes to vendor banking information, enforce approval routing, and require additional authorization for high-value payments.

Common accounts payable challenges and solutions

Even well-run AP teams face recurring issues that can disrupt cash flow, strain vendor relationships, and increase processing costs. Addressing these challenges early helps you maintain accurate records and avoid avoidable fees.

Late payment penalties and how to avoid them

Late payment fees add up quickly and can damage your reputation with suppliers. Prioritize invoices by their due dates rather than processing them in the order received, and set up reminders for upcoming deadlines. Automated payment scheduling reduces the risk of missed payments by sending alerts several days before invoices come due.

Managing cash flow while maintaining vendor relationships

Balancing available cash with payment obligations requires proactive planning. Negotiate extended payment terms when possible, and communicate early if you anticipate delays. Pay early when discounts provide clear financial value, stick to standard terms for routine invoices, and request extensions during tight cash periods while keeping key suppliers informed.

Dealing with invoice discrepancies

Incorrect pricing, quantity mismatches, and missing documentation slow down processing and approvals. Implement 3-way matching to compare the purchase order, receiving report, and invoice before payment. Establish an escalation process with clear ownership, expectations for response times, and documented communication with vendors to keep resolution efficient.

Preventing fraud and duplicate payments

Duplicate payments often occur when vendors submit invoices through multiple channels or when invoice numbers vary slightly. Use AP software that flags duplicate invoice numbers and unusual amounts before payment. Strengthen fraud prevention by separating invoice approval from payment execution, verifying vendor banking changes through a secondary communication channel, requiring dual signatures for high-value payments, and conducting periodic audits of the vendor master file.

Use Ramp automation to make recording AP easier

Recording AP manually is time-consuming and prone to errors. Accounts payable automation can streamline the process and solve both of those problems.

Ramp Bill Pay automates your entire accounts payable workflow, beginning from when you receive an invoice through approvals, payments, and reconciliation.

Here’s what you can expect when you use Ramp to automate your AP process:

• Automated invoice processing: With Ramp, you can import bills right from your ERP and select a payment method, saving your accounts payable department the time of entering the details manually
• Improved accuracy: Ramp catches and flags errors that can be easily overlooked in manual accounts payable processes, such as duplicate invoices. Ramp even notices and corrects empty fields, like using a bill’s payment terms to fill in a missing due date and prevent late payment.
• Customizable approval workflows: No more confusion around who’s next in the approval chain. Ramp lets you create custom approval workflows that automatically route the bill where it needs to go next.

Watch a demo to learn more about how automating your accounts payable process with Ramp can save your company time and money.