July 11, 2025

What is accounts payable? Meaning, process, and examples

Accounts payable (AP) is the money a business owes to vendors or suppliers for goods and services purchased on credit, typically due within 30 to 90 days. Effective AP management is crucial for maintaining healthy cash flow, building strong vendor relationships, and supporting your company’s financial stability.

But AP can feel overwhelming with so many details to navigate. This guide breaks down everything you need to know—from the basics of what AP includes to the systems and strategies that help teams run it efficiently. We’ve organized it into clear, actionable sections so you can go deep or skim as needed. Whether you're new to AP or looking to improve your process, you're in the right place.

What is accounts payable (AP)? Definition and core concepts

definition
Accounts payable

Accounts payable (AP) is the amount your company owes to vendors or suppliers for goods and services purchased on credit—essentially, money your business has promised to pay others. When you receive inventory, supplies, or services before paying, those unpaid bills become accounts payable.

On the balance sheet, accounts payable appears as a current liability—meaning it's a debt that must be paid within one year or the business's normal operating cycle, whichever is longer. AP fits here because these obligations usually require payment within 30, 60, or 90 days, depending on supplier terms.

AP tracks all outstanding invoices from suppliers and service providers, including raw materials, inventory, utility bills, and professional services. Tracking AP helps businesses maintain accurate records of what they owe, plan cash outflows, and avoid missing payment deadlines.

The accounts payable team manages the entire invoice-to-payment process. Their responsibilities include:

  • Receiving and processing invoices
  • Verifying that goods or services were received
  • Matching invoices to purchase orders
  • Getting proper approvals for payment
  • Recording transactions in the accounting system
  • Disbursing payments to vendors

In summary, AP is money owed to suppliers for purchases made on credit, appears as a current liability on the balance sheet, is a critical part of working capital management, and effective AP processes ensure timely payments and strong vendor relationships.

Why accounts payable matters: Importance and impact on business

Managing accounts payable well has a direct effect on cash flow and liquidity. Cash flow is the movement of money in and out of your business, while liquidity is how quickly you can turn assets into cash to pay short-term bills.

When AP is managed effectively, you can time payments to keep cash levels healthy, hold onto cash longer when needed, or take advantage of early payment discounts. Poor AP management creates risks, such as late payment penalties, cash shortages, and damaged vendor relationships, which can disrupt operations and harm your reputation.

AP also helps balance payment timing with revenue collection, maintaining healthy cash reserves—especially important during seasonal slowdowns or economic downturns.

Strong AP management is essential because it:

  • Preserves working capital by optimizing payment timing
  • Prevents unnecessary late fees and penalties
  • Maintains positive vendor relationships, leading to better terms
  • Provides accurate financial data for decision-making
  • Supports business continuity by ensuring access to essential supplies and services

Accounts payable vs accounts receivable: Key differences explained

Accounts receivable (AR) is money owed to your business by customers who bought goods or services on credit. While AP tracks what you owe others, AR tracks what others owe you. These functions work in opposite directions but are both crucial for financial management.

Characteristic

Accounts payable (AP)

Accounts receivable (AR)

Definition

Money a company owes to vendors/suppliers

Money owed to a company by its customers

Balance sheet classification

Current liability

Current asset

Cash flow impact

Outflow (negative)

Inflow (positive)

Typical transactions

Purchases of inventory, supplies, services

Sales of products or services on credit

Business goal

Optimize payment timing, maintain vendor relationships

Accelerate collections, minimize bad debt

Key metrics

AP turnover ratio, days payable outstanding

AR turnover ratio, days sales outstanding

Responsible party

AP department/team

AR department/team

Documentation

Vendor invoices, purchase orders

Customer invoices, contracts

Understanding the difference between AP and AR is critical for accurate financial reporting. Mixing them up can cause major errors—like understating liabilities or overstating assets—which gives a false picture of your company's finances.

A quick way to remember: AP is money going out (you pay), AR is money coming in (you receive). Or, AP for "pay" and AR for "receive." Keeping these straight helps you maintain accurate books and make smart decisions.

faq
Is AP a current liability?

Yes, accounts payable is classified as a current liability on the balance sheet alongside other short-term debts. Current liabilities are obligations a business must settle within a year, and AP fits squarely into this category, similarly to trade payables. It represents unpaid debts to suppliers for goods and services already received, typically requiring payment within 30 to 45 days.

How the accounts payable process works: Manual vs. automated

While our other guide, The Ideal Accounts Payable Process, goes over the AP process in detail, here’s a quick overview of the key elements you need to know.

The AP process revolves around managing incoming invoices, ensuring invoices are received, verified, approved, recorded, and paid accurately and on time. Carefully tracking liabilities and processing payments efficiently will help businesses optimize their cash flow.

Here's a typical AP process:

  1. Invoice receipt and data entry: Collect vendor bills through various channels and record invoice details in the accounting system
  2. Verification and approval: Match invoice details with purchase orders and receiving reports and get authorization from the right managers or departments
  3. Payment scheduling and execution: Decide when to pay based on terms and cash flow and disburse funds via check, ACH, wire transfer, or other methods
  4. Recording and reconciliation: Update the general ledger to reflect the payment and ensure all transactions are properly documented and accounted for

In a manual AP process, every step relies on physical documents, spreadsheets, or basic accounting systems—without the support of automation. While this method might work for smaller businesses, it’s often time-consuming, error-prone, and hard to scale as a business grows.

Whether you’re using a manual or automated approach, understanding the AP process is crucial for maintaining accurate financial records and optimizing cash flow. We’ll dive deeper into AP automation later.

How AP is recorded

As stated earlier, AP is recorded in the general ledger as a current liability. When a company receives an invoice, the accounts payable account is credited, and the corresponding expense or inventory account is debited. Once the invoice is paid, the AP account is debited to reduce the liability, and the cash account is credited to reflect the payment.

AP is sometimes confused with bills payable, but they are not identical. While bills payable falls under the broader category of AP, it specifically refers to formal agreements, such as promissory notes or contracts with defined payment terms. Both are listed as liabilities and play a critical role in managing short-term financial obligations.

Ensuring compliance with internal controls

Maintaining compliance and strong internal controls is critical to an efficient and reliable accounts payable process. AP compliance ensures the company follows laws, regulations, and internal policies—like issuing accurate tax forms, meeting payment deadlines, and honoring vendor agreements.

Internal controls work hand in hand with compliance by implementing safeguards to prevent errors, fraud, and mismanagement. Key compliance steps and best practices include:

  • Segregation of duties: Different people should handle different AP tasks. The person approving invoices shouldn't process payments. This reduces fraud risk.
  • Authorization hierarchies: Set approval thresholds by invoice amount. Small purchases might need one approval; larger ones require multiple sign-offs. Document who can approve what.
  • Regular reconciliations: Compare AP ledger balances with vendor statements monthly to catch discrepancies early and complete reconciliation.
  • Vendor master file controls: Use strict procedures for adding or changing vendor info. Always verify and approve changes to payment details.
  • Documentation retention: Keep complete records—like invoices, purchase orders, receiving docs, and payment confirmations. These support audit trails and resolve disputes.
  • Periodic audits: Regularly audit the AP process to check compliance and find improvement opportunities. External audits add extra assurance.
  • Clear policies and procedures: Document AP processes in detail and train your team. Update regularly as things change.

Strong controls prevent fraud and errors, standardize processes, and provide reliable financial information for decision-making. They also build stakeholder confidence in your company's financial management.

Designing efficient AP workflows

An efficient AP workflow is the backbone of a well-managed accounts payable process. It ensures that every step—receiving, reviewing, approving, recording, and paying invoices—is completed in a consistent, organized manner to avoid errors and delays.

To design an efficient AP workflow, focus on creating a clear process with the following key steps:

  • Receive and validate invoices: Ensure that all invoices are accurate by matching them against purchase orders and delivery receipts.
  • Secure necessary approvals: Route invoices to the appropriate manager or team for timely sign-off.
  • Process payments: Schedule and issue payments based on agreed terms to optimize cash flow and avoid late fees.

However, the real key to designing an efficient AP workflow lies in automating it. Automation reduces errors, eliminates repetitive tasks, and streamlines the approval and payment process.

While we cover this in greater detail in this guide, Setting Up Automated Workflows, here are the key benefits of an automated AP workflow:

  • Automatic notifications for invoice approvals to prevent bottlenecks
  • Built-in checks to reduce errors and ensure data accuracy
  • Timely scheduling of payments to maintain vendor relationships and avoid late fees

When thoughtfully designed and optimized—whether manually or with automation—an AP workflow improves cash flow management and frees up time for higher-value work.

Common accounts payable expenses: Operational vs non-operational

Operational AP expenses are costs tied directly to your core business activities—such as raw materials for manufacturing or vendor payments for maintenance, utilities, and production supplies. These expenses are usually recurring and predictable, forming the base of your cost of goods sold (COGS) or, if not directly tied to production, your operating expenses.

Non-operational AP expenses, on the other hand, aren't directly tied to production and typically include items like interest expenses, losses on asset sales, or legal settlements. Some administrative costs, such as certain travel expenses or equipment purchases, may be considered operating expenses unless they are unusual or one-time in nature.

Category

Operational AP expenses

Non-operational AP expenses

Definition

Costs directly related to producing goods/services

Costs that support the business but aren't directly tied to production

Timing

Typically recurring and regular

Often irregular or one-time

Financial impact

Usually affects COGS or operating expenses

Often affects SG&A or capital expenditures

Examples

Raw materials, production supplies, manufacturing services, direct labor contractors

Interest expenses, losses on asset sales, legal settlements, restructuring costs

Budget category

Production/operations

Administrative, capital expenditure, R&D

Payment priority

Generally higher (affects production)

May be lower or deferred when necessary

Distinguishing between operational and non-operational expenses is key for accurate financial reporting. COGS and operating expenses affect gross and operating profit, while non-operating expenses impact net profit. This helps management separate true production costs from overhead, leading to better pricing and profitability analysis.

To categorize AP expenses correctly:

  • Set clear guidelines in your chart of accounts
  • Train AP staff to spot the differences
  • Verify during invoice coding
  • Review classifications regularly for accuracy

Consistent categorization provides reliable data for financial analysis and decision-making.

Measuring accounts payable efficiency: The AP turnover ratio

The accounts payable turnover ratio shows how quickly your company pays its suppliers. It measures how many times you pay off your average AP balance in a year. A higher ratio means you pay vendors more often; a lower ratio means you take longer to pay.

Formula:

AP Turnover Ratio = Total Supplier Purchases / Average Accounts Payable

To find average AP, add the beginning and ending balances for the period and divide by 2:

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

Example calculation:

  • Total supplier purchases: $500,000
  • AP balance on January 1: $80,000
  • AP balance on December 31: $120,000
  • Calculate average AP: ($80,000 + $120,000) / 2 = $100,000
  • Calculate AP turnover ratio: $500,000 / $100,000 = 5
  • This means you pay off your average AP balance 5 times per year.
  • Optional: Convert to days payable outstanding (DPO): 365 / 5 = 73 days

The AP turnover ratio gives insight into your cash management and vendor relationships. A very high ratio might mean you're paying bills too quickly and missing out on using cash elsewhere. A very low ratio could signal cash flow problems or that you're stretching payments to preserve cash.

Compare your ratio to industry benchmarks for meaningful analysis. Track it over time to spot trends, and balance it with other metrics like the cash conversion cycle for a full picture of your working capital management.

A month of work done in minutes.

Handle 10x the invoices in half the time.

abstract graphic of an invoice and payment amount

Overcoming AP challenges: Skills and solutions for AP teams

The accounts payable department faces a variety of challenges as they work to ensure accurate and efficient payment processes. The table below highlights common challenges, the responsibilities tied to them, and practical solutions:

Challenge

Responsibility

Solution

Invoice errors

Ensuring invoice accuracy

Implement automated invoice software with validation tools to catch discrepancies

High invoice volume

Managing large workloads

Use AP automation to streamline data entry and approvals

Late payments

Managing payment schedules

Set up reminders or approval workflows to meet deadlines

Vendor disputes

Resolving payment discrepancies

Maintain clear communication and accurate records

Fraud risks

Detecting and preventing fraud

Use fraud detection software and establish approval controls

Regulatory compliance

Adhering to AP regulations

Stay updated with compliance tools and conduct regular audits

Manual processes

Reducing inefficiencies

Transition to digital workflows and AP software

To effectively overcome these challenges and excel in managing transactions, invoice payments, and other responsibilities, AP teams need a well-rounded skill set:

  • Technical knowledge: Accounting software, ERP systems, data analysis tools
  • Accounting expertise: Understanding principles, tax regulations, financial controls
  • Analytical thinking: Spotting patterns, anomalies, and solving reconciliation issues
  • Attention to detail: Prevents costly errors
  • Communication: For vendors and internal teams
  • Time management: Handling priorities and deadlines
  • Problem-solving: Quick resolution of discrepancies and bottlenecks

As AP professionals advance, leadership skills become important—like strategic thinking, change management, and team development. Building a high-performing AP function requires investing in ongoing training, standardizing and updating procedures, leveraging technology that matches your needs, and tracking performance metrics that balance efficiency, accuracy, and strategic value.

Automating accounts payable: Benefits and steps to take

Automating accounts payable processes transforms how businesses manage payments, offering significant improvements in accuracy, efficiency, and financial oversight. Here’s a breakdown of the key AP benefits:

Benefit

Description

Error reduction

Automation eliminates data entry mistakes and prevents duplicate payments

Time savings

Streamlined workflows free up staff to focus on higher-value tasks

Improved cash flow management

Payment scheduling optimizes cash flow and helps avoid late fees

Increased vendor satisfaction

Timely, accurate payments strengthen vendor relationships

Enhanced compliance

Automated tracking ensures adherence to tax laws and regulatory requirements

Actionable insights

Real-time reporting provides insights into spending trends and the impact of transactions on financial statements

Steps to optimize AP through automation

Automated accounts payable processing can transform how your business handles payments and help you achieve your AP goals. By reducing manual workloads and eliminating errors, automation allows teams to focus on strategic tasks rather than repetitive ones.

Here’s how to streamline your AP process with actionable automation strategies:

  • Use invoice scanning software: Leverage optical character recognition (OCR) to digitize invoices and automatically input data, cutting down on manual entry.
  • Set up automated workflows: Create rules that route invoices to the right managers for approval, minimizing delays and bottlenecks.
  • Integrate AP automation tools: Connect your AP software with accounting systems like QuickBooks for seamless data sharing and improved accuracy.
  • Enable automatic payment scheduling: Schedule payments to ensure they’re made on time while optimizing cash flow.
  • Monitor and audit performance: Use reporting tools to identify inefficiencies, track key metrics, and maintain compliance with regulations.

By following these steps, businesses can build a more efficient, accurate, and scalable AP process.

Choosing the right AP software for your business

Choosing the right accounts payable automation software depends on your business’s size, industry, and unique needs. To make an informed decision, focus on the features, scalability, and integrations that each solution offers. Here are the key factors to consider:

  • Ease of use: Look for intuitive software that minimizes the need for extensive training.
  • Integration capabilities: Ensure the tool integrates seamlessly with your existing accounting or ERP systems.
  • Scalability: Choose a solution that can adapt as your business grows.
  • Customer support: Assess the quality of onboarding assistance and ongoing support to ensure a smooth implementation.

When choosing AP automation software, start by considering your invoice volume. Fewer than 500 invoices monthly may require different features than thousands. Integration with your accounting system is crucial for smooth data flow. Also, consider vendor onboarding needs and total cost of ownership—not just the initial price.

Glossary of key accounts payable terms

  • Accounts payable (AP): Money a company owes to vendors or suppliers for goods and services purchased on credit. Think of it as your business's "to pay" list.
  • Accounts receivable (AR): Money owed to a company by customers who purchased goods or services on credit. This is your business's "to collect" list.
  • Current liability: A financial obligation that must be paid within one year or the normal operating cycle of the business. AP is a current liability because these debts are typically due within 30-90 days.
  • GL code: General Ledger Code, a numbering system used to categorize different types of financial transactions. These codes help organize financial data for reporting and analysis, like filing cabinets for different types of financial information.
  • AP turnover ratio: A financial metric that measures how quickly a company pays its suppliers, calculated by dividing total purchases by average accounts payable. Similar to how quickly you clear items off your to-do list.
  • Three-way matching: The process of comparing purchase orders, receiving reports, and vendor invoices to verify accuracy before payment. Like triple-checking that what you ordered, what arrived, and what you're being charged for all match up.
  • Automation: Using technology to perform AP tasks with minimal human intervention. This includes invoice capture, data extraction, approval routing, and payment processing.
  • Internal controls: Procedures designed to safeguard assets, ensure accurate financial reporting, and promote operational efficiency. In AP, these include approval hierarchies, segregation of duties, and audit trails.
  • Purchase order (PO): A document sent from a buyer to a supplier requesting goods or services, including quantities, prices, and delivery terms. It's a formal agreement that helps control spending and provides a reference for invoice verification.

How Ramp Bill Pay is the best way to streamline AP

Ramp Bill Pay is an advanced, AI-driven accounts payable solution engineered to tackle the toughest AP challenges. From seamless invoice collection and line-item extraction to scheduled payments and simplified reconciliation, Ramp automates data entry, routes invoices for approval, and easily syncs with your ERP—accelerating month-end close and reducing manual work.

While traditional AP platforms struggle with inflexible ERP connections, spotty PO matching, and segmented processes, Ramp Bill Pay delivers full-scope automation that’s both agile and precise. It’s designed for transparency and oversight, empowering teams from the first invoice through to the last payment.

Ramp ranks among one of the easiest AP automation solutions to use based on G2 reviews (as of June 5, 2025), with an average score of 4.8 out of 5 stars from over 2,000 verified users. Finance leaders consistently praise Ramp for reducing administrative tasks, preventing costly mistakes, and ensuring data integrity. One user even called it the best way to manage business finances.

How AP processes get off track

Typical AP operations encounter bottlenecks at several points:

  • Reconciling invoices that don’t match purchase orders
  • Approvals delayed by manual email chains
  • Entering and updating invoice data across systems by hand

Ramp Bill Pay eliminates these pain points with a suite of specialized features:

  • Seamless two-way matching of invoices to purchase orders
  • Smart invoice scanning powered by AI, including GL code suggestions
  • Automated approval routing with tailored user permissions
  • Integrated controls spanning AP, procurement, expenses, and accounting
  • Flexible support for ACH, card, checks, and international/domestic wires
  • Automated scheduling for recurring bills, batch payments, and vendor payment tracking
  • Real-time ERP syncing for NetSuite, QuickBooks, Xero, and other platforms

Businesses ranging from small, mid-sized, or enterprise-level already turn to Ramp to simplify AP, boost accuracy, and empower their teams. For example:

What sets Ramp Bill Pay apart?

Ramp Bill Pay isn’t just another accounts payable solution—it sets the benchmark for what leading AP software should offer. With intelligent automation, dependable ERP connections, and workflows designed for real-world teams, Ramp empowers you to move faster and operate with confidence on every invoice. Using Ramp’s AP software offers a free tier to start, a step up at $15 per user per month, and custom pricing available for enterprises.

Discover a better way to manage AP. Experience Ramp Bill Pay for yourself.

Try Ramp for free
Share with
Richard MoyFinance Writer, Ramp
Richard Moy has written extensively about procurement and vendor management topics for companies like BetterCloud, Stack Overflow, and Ramp. His writing has also appeared in The Muse, Business Insider, Fast Company, Mashable, Lifehacker, and more.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.

FAQs

We’ve simplified our workflows while improving accuracy, and we are faster in closing with the help of automation. We could not have achieved this without the solutions Ramp brought to the table.

Kaustubh Khandelwal

VP of Finance, Poshmark

Poshmark

Our previous bill pay process probably took a good 10 hours per AP batch. Now it just takes a couple of minutes between getting an invoice entered, approved, and processed.

Jason Hershey

VP of Finance and Accounting, Hospital Association of Oregon

Hospital Association of Oregon

When looking for a procure-to-pay solution we wanted to make everyone’s life easier. We wanted a one-click type of solution, and that’s what we’ve achieved with Ramp.

Mandy Mobley

Finance Invoice & Expense Coordinator, Crossings Community Church

Crossings Community Church

We no longer have to comb through expense records for the whole month — having everything in one spot has been really convenient. Ramp's made things more streamlined and easy for us to stay on top of. It's been a night and day difference.

Fahem Islam

Accounting Associate, Snapdocs

Snapdocs

It's great to be able to park our operating cash in the Ramp Business Account where it earns an actual return and then also pay the bills from that account to maximize float.

Mike Rizzo

Accounting Manager, MakeStickers

Makestickers

The practice managers love Ramp, it allows them to keep some agency for paying practice expenses. They like that they can instantaneously attach receipts at the time of transaction, and that they can text back-and-forth with the automated system. We've gotten a lot of good feedback from users.

Greg Finn

Director of FP&A, Align ENTA

Align ENTA

The reason I've been such a super fan of Ramp is the product velocity. Not only is it incredibly beneficial to the user, it’s also something that gives me confidence in your ability to continue to pull away from other products.

Tyler Bliha

CEO, Abode

Abode