How to calculate accounts payable: Formulas and examples

Calculating accounts payable means tracking what your business owes to suppliers and vendors for products or services bought on credit. This requires monitoring outstanding invoices, payment terms, and due dates to keep your financial records accurate. When you manage AP effectively, you avoid missed payments, late fees, and supply chain disruptions while gaining clear insight into your short-term financial obligations.

In this guide, we’ll go over the basic formula for calculating accounts payable, understand important metrics like turnover ratio and days payable outstanding, and how automation can make your AP process more efficient.

How to calculate accounts payable

Accounts payable covers the short-term debts your business owes for goods or services received on credit. Managing these obligations helps you maintain vendor trust, protect your credit, and ensure you always have the supplies you need.

To calculate accounts payable, you’ll need to use this formula:

Ending Accounts Payable = Beginning Accounts Payable + Purchases on Credit - Payments to Suppliers

Let's break down each part:

Beginning accounts payable

This is the total owed to suppliers at the start of the accounting period.

• It's your baseline for tracking changes
• You'll find it as a current liability on your previous balance sheet
• It shows your commitments before new transactions occur

Purchases on credit

These are new invoices from vendors during the period.

• They increase your accounts payable balance
• This includes goods or services acquired without immediate payment
• All credit-based transactions count, regardless of payment terms (like net-30 or net-60)

Payments to suppliers

This is the money paid out to vendors to reduce your accounts payable.

• All payment methods count (checks, ACH, wire, credit card)
• Each payment fulfills a previous credit obligation

Example of using the accounts payable formula

Let's go over a quick example:

1. Company A starts January with $45,000 in accounts payable
2. They purchase $30,000 in inventory on credit during January
3. Company A pays $35,000 to vendors that month
4. This means your Ending Accounts Payable = $45,000 + $30,000 - $35,000 = $40,000

At the end of January, Company A still owes $40,000 to suppliers. What does this mean for your business? If your ending AP is higher than your beginning AP, it might signal:

• Increased purchasing (business growth)
• Delayed payments to keep more cash
• Potential cash flow problems

If your ending AP is lower, as in the example, it could indicate:

• Reduced purchasing activity
• Faster payments (e.g., to take advantage of early payment discounts)
• A deliberate effort to reduce liabilities, but not necessarily a stronger cash position unless evaluated alongside cash flow

Additional key accounts payable metrics

Beyond the basic calculation, several other metrics can help you analyze your payment practices and supplier relationships. These insights support better financial decisions, help you manage cash flow, and reveal opportunities for improvement.

1. Average accounts payable

Average accounts payable tells you the typical amount owed to suppliers during a period. This metric helps you spot trends and seasonal changes in payment behavior. To calculate your average AP, use this formula:

Average AP = (Beginning Accounts Payable + Ending Accounts Payable) / 2

When calculating your average AP, check your balance sheet at the start and end of the period. The AP line item shows what you owe suppliers.

For example, If your balance sheet shows $45,000 in AP on January 1 and $55,000 on December 31: Your Average AP = ($45,000 + $55,000) / 2 = $50,000

A rising average may signal business growth or slower payments. A falling average could mean reduced purchasing or faster payment cycles. Comparing average AP across quarters helps you spot seasonal patterns and make better cash flow decisions.

2. Accounts payable turnover ratio

The accounts payable turnover ratio shows how quickly you pay your suppliers. This ratio helps you gauge payment efficiency:

• High turnover: You pay vendors quickly. This can strengthen relationships, but might stretch your cash flow.
• Low turnover: You pay more slowly. This preserves cash, but could harm supplier relationships or cost you early payment discounts.

Here is the formula you’ll need to use:

AP Turnover Ratio = Total Supplier Purchases / Average Accounts Payable

To calculate your AP turnover ratio, get the total supplier purchases on credit from your general ledger or P&L (only include purchases on credit, not cash).

For example, let’s say you spent $240,000 on credit purchases this year and your average accounts payable is $30,000. This means your AP Turnover = $240,000 / $30,000 = 8.

This means you pay off your average accounts payable balance 8 times per year—or about every 45 days. Compare this figure to your payment terms (net-30, net-60) to see if you're paying bills at the right pace.

3. Days payable outstanding (DPO)

Days payable outstanding measures how long, on average, it takes you to pay suppliers after receiving invoices. DPO is a key cash flow metric where:

• Higher DPO: You hold onto cash longer
• Lower DPO: You pay suppliers faster

The formula for DPO is:

DPO = (Average Accounts Payable / Cost of Goods Sold) × 365 days

To calculate your DPO, let’s say your average accounts payable is $50,000. Then, determine your annual cost of goods sold. Let’s say it’s $600,000. This means your DPO = ($50,000 / $600,000) × 365 = 30.4 days

So, your business takes about 30 days, on average, to pay suppliers. If your standard terms are net-30, you're right on schedule. If your DPO is lower, consider whether you’re missing opportunities to hold cash longer. If it’s higher, check for supplier risks or late payment penalties.

How automation makes accounts payable processing faster

Automating accounts payable changes the way you manage, track, and analyze payment obligations. Modern AP automation platforms reduce manual data entry by extracting invoice details and tracking payments automatically. This gives you real-time insight into payment status and overall financial health.

Here's how automation benefits your accounts payable process:

• Reduced processing time: Automated systems capture invoice data and route approvals instantly, cutting processing times compared to manual methods
• Fewer manual errors: Automation eliminates mistakes like typos, miscalculations, and duplicate payments, keeping your financial data reliable
• Real-time insights: Access live dashboards and up-to-date metrics, so you always know your current obligations and upcoming payments—no more waiting for month-end
• Streamlined operations: Integrate with your existing accounting systems for seamless data flow between purchasing, receiving, and payments
• Improved cash flow management: Automated scheduling helps you pay at the optimal time—taking advantage of early payment discounts or strategically managing cash outflows
• Enhanced visibility into liabilities: Get instant access to reports showing your financial obligations, aging summaries, and vendor payment history for smarter planning

How Ramp simplifies accounts payable and tracking

Managing accounts payable and monitoring key AP metrics is essential for maintaining healthy cash flow and strong vendor relationships. Ramp’s AP automation platform streamlines this process by giving finance teams real-time visibility into invoices, payment schedules, and vendor activity—all in one place.

Ramp provides:

• Centralized invoice management: Automatically captures invoices from email or uploads, so you can easily track what’s owed and when it’s due
• Real-time visibility and insights: Built-in reporting tools offer up-to-date views of outstanding payments, upcoming due dates, and how invoice activity may impact your cash position
• Automated approvals and payment scheduling: Route invoices through custom approval workflows and schedule payments to align with due dates or cash flow strategy

By automating manual AP tasks and surfacing insights when you need them, Ramp helps finance teams save time, reduce errors, and maintain better control over financial operations.

Get started with Ramp.