What is accounts payable? A guide to expert AP management

Accounts payable (AP) plays a crucial role in managing a company’s financial obligations, ensuring that bills are paid on time, cash flow is optimized, and vendor relationships are maintained. But effective AP management requires more than just processing invoices—it involves a structured workflow that minimizes errors, prevents fraud, and improves overall financial stability. 

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In this article, we’ll walk you through the accounts payable process from receiving invoices to scheduling payments and reconciling accounts. We’ll also highlight best practices, common challenges, and the benefits of AP automation. 

What does accounts payable mean?

Accounts payable represents the money a company owes to vendors for goods or services received on credit. It reflects the business’s short-term liabilities and plays an essential role in maintaining cash flow while ensuring that financial commitments are met.

What does accounts payable do?

Accounts payable manages the company’s outstanding bills, making sure invoices and bills are paid on time. This helps the business avoid late fees, maintain solid relationships with suppliers, and support cash flow management, contributing to overall financial stability.

Understanding the AP process

The accounts payable process involves managing incoming invoices, verifying accuracy, and ensuring timely payments. By carefully tracking liabilities and processing payments efficiently, it ensures a company can meet its financial obligations, maintain vendor relationships, and optimize cash flow.

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1. Receiving Invoices: The process starts when a company receives an invoice from a vendor or supplier for goods or services rendered. The invoice details what was delivered, the cost, and the payment terms.
2. Verifying and Matching: Once the invoice is received, it must be verified. This involves confirming that the billed amount is accurate, the goods or services were received as expected, and that the payment terms and vendor details are correct. In many cases, companies use a 3-way match to compare the invoice with the purchase order and the delivery receipt to ensure the billing is correct.
3. Approving Invoices: After verification, the invoice moves to the approval stage. This step often requires sign-off from department heads or managers, particularly for larger payments. The approval process ensures that the payment is legitimate and complies with internal controls.
4. Recording the Transaction: Once the invoice is approved, it is entered into the company’s accounting system. This records the company’s obligation to pay the vendor and schedules the payment based on the agreed terms. Payment dates and any early payment discounts are also noted during this step.
5. Scheduling Payment: The accounts payable team schedules the payment according to the invoice’s due date. Many companies time their payments to optimize cash flow, paying close to the due date to keep liquidity available while avoiding late fees.
6. Processing the Payment: When the payment due date arrives, AP processes the payment. Depending on the vendor’s preferences, this could involve initiating an electronic transfer, issuing a check, or using other payment methods like credit cards or wire transfers. The payment is then recorded in the accounting system as complete.
7. Reconciling Accounts: After payments are made, the AP team reconciles its records with the vendor’s statements. This involves comparing the outstanding balances and payment records, resolving any discrepancies, and ensuring that all transactions are accurately recorded.
8. Maintaining Vendor Relationships: A well-run AP process contributes to strong vendor relationships. By ensuring payments are made on time and disputes are resolved quickly, companies maintain trust and can often negotiate better terms with their vendors in the future.
9. Managing Cash Flow: Throughout the process, careful attention is paid to managing cash flow. The company balances outgoing payments with incoming revenue, ensuring that it maintains sufficient liquidity for day-to-day operations while avoiding financial strain.

What is the difference between accounts receivable and accounts payable?

Accounts receivable represents money owed to a company by customers for goods or services sold. Accounts payable represents money a company owes to vendors or suppliers for goods or services purchased on credit (more on AP vs AR here).

What type of account is accounts payable?

Accounts payable is a liability account. It represents a company's obligation to pay for goods or services received but not yet paid for.

Is accounts payable an asset?

No, accounts payable is not an asset. It is classified as a liability because it represents money the company owes to vendors and suppliers.

How do you calculate accounts payable?

Accounts payable is calculated by summing all outstanding bills and invoices that a company has received but has not yet paid. This total reflects the company’s short-term liabilities to suppliers.

How do you find accounts payable?

Accounts payable is typically found on the company’s balance sheet under current liabilities. It can also be tracked through the company’s accounting system where all unpaid invoices are recorded.

How to manage accounts payable effectively

Managing accounts payable (AP) effectively requires a structured process with strong internal controls to minimize errors, fraud, and inefficiencies. The first step is to set up a clear approval process, ensuring invoices are matched with purchase orders and delivery receipts for accuracy.

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Automation tools significantly reduce manual data entry errors, enhance tracking, and streamline payments. Maintaining accurate records, regularly reconciling vendor statements, and monitoring payment schedules are crucial for optimizing cash flow. Prioritizing timely payments helps avoid late fees and strengthens vendor relationships.

Benefits

Effectively managing accounts payable offers several benefits that contribute to a company's financial health and operational efficiency:

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• Strengthens vendor relationships through on-time payments
• Improves cash flow management by optimizing payment schedules
• Reduces errors via a structured, well-documented process
• Minimizes late fees and captures early payment discounts
• Enhances financial stability by managing short-term liabilities effectively

Challenges

Despite its importance, managing accounts payable presents various challenges, such as:

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• Handling large volumes of invoices, which can lead to errors and delays
• Managing diverse payment terms across multiple vendors
• Ensuring proper internal controls to prevent fraud or unauthorized payments
• Reconciling discrepancies between vendor statements and company records
• Balancing cash flow while meeting payment deadlines

Overseeing AP payments

Overseeing AP payments in B2B transactions involves managing payment schedules, ensuring vendor compliance, and optimizing cash flow. Key responsibilities include:

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• Coordinating payments based on vendor terms
• Selecting efficient B2B payment methods (e.g., ACH, wire transfers)
• Implementing internal controls to prevent fraud
• Monitoring cash flow and negotiating favorable payment terms

AP Best Practices

To manage accounts payable effectively, consider these best practices:

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• Establish clear policies for invoice processing, approval workflows, and payment terms
• Centralize invoice processing to reduce errors and improve efficiency
• Automate tasks using AP software to minimize manual work and speed up processing
• Regularly review accounts to ensure invoices are accurate and payments are timely
• Monitor cash flow projections to ensure sufficient funds are available for short-term obligations
• Leverage early payment discounts to reduce costs and improve cash flow
• Implement strong internal controls to prevent fraud and ensure accurate reporting
• Continuously improve the AP process by identifying inefficiencies and adjusting workflows

How to Automate accounts payable

Ramp simplifies AP automation by streamlining the entire workflow, from invoice capture to payment. By eliminating manual data entry and approval delays, Ramp boosts accuracy and efficiency. Its OCR technology extracts key details from invoices, automates the matching process, and supports various payment methods like ACH, checks, and international wires. Integrating seamlessly with accounting systems such as QuickBooks and NetSuite, Ramp ensures real-time data sync, improving visibility into cash flow and financial obligations.

Accounts payable examples

In each of these examples, the company incurs an expense or acquires goods or services on credit, creating an accounts payable obligation:

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• Inventory Purchases: A retail store orders products from a wholesaler on credit terms of net 30 days. The amount owed to the wholesaler for this purchase would be filed under accounts payable until paid within the agreed-upon 30-day period.
• Office Supplies: A law firm purchases office supplies, such as paper, pens, and printer cartridges, from a local supplier on credit. The outstanding amount owed to the supplier would be filed under accounts payable until the law firm makes the payment.
• Utilities: A factory receives a monthly water bill but has not yet paid the amount due. This unpaid bill is filed under accounts payable until the factory pays the utility provider.
• Equipment Rental: A construction company rents heavy machinery for a specific project and receives a monthly statement from the equipment rental company. Until it pays the rental invoice, the outstanding balance is filed under accounts payable.‍
• Advertising Expenses: An e-commerce business runs an advertising campaign with a media agency and receives an invoice for the services provided. The amount due to the media agency is filed under accounts payable until the e-commerce company pays the invoice.

Take charge of your accounts payable with Ramp

Ramp's accounting automation platform streamlines and optimizes the AP process with real-time data sync, automated invoice processing, and integrated payments. Ramp’s automation capabilities simplify invoice processing, ensuring timely payments and helping you build strong relationships with vendors.

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Get Ramp today and experience the power of automated accounts payable first-hand.

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