What is accounts payable? A full guide to everything AP

Accounts payable (AP) is essential to keeping a company’s finances in check—ensuring bills are paid on time, cash flow stays on track, and vendor relationships remain strong.

‍

But AP can feel overwhelming with so many details to navigate. That’s why we’ve broken it down into manageable sections, making each aspect easier to understand. Think of these as mini chapters designed to help you master AP step by step.

‍

Here’s how we’ve organized this guide to set you up as an AP expert:

• Chapter 1: Definition, importance, and classification
• Chapter 2: The accounts payable process and designing workflows
• Chapter 3: Challenges and skills for AP teams 
• Chapter 4: Common examples of accounts payable expenses
• Chapter 5: Why you should use AP automation software

Chapter 1: Definition, importance, and classification

What is accounts payable and what does it do?

Accounts payable (AP) tracks what your business owes to suppliers or vendors for goods and services you’ve received but haven’t paid for yet. Recorded as a short-term liability on your balance sheet, these payments are usually due within 30 to 45 days.

‍

Beyond its role in tracking obligations, AP is essential for managing cash flow and maintaining your company’s financial health. Essentially, AP ensures that a company’s outstanding bills are managed efficiently—making sure invoices are paid on time, avoiding late fees, and supporting overall cash flow management.

‍

In many businesses, “accounts payable” also refers to the team responsible for processing invoices, verifying purchases, and ensuring vendors are paid on time.

The importance of AP and its impact on cash flow

Accounts payable is a critical part of cash flow strategy, helping businesses balance outgoing payments with incoming revenue. This ensures enough liquidity to fund operations without disrupting other financial priorities. Mismanaging AP can lead to cash flow challenges and slowed growth, all the more reason to handle AP properly.

‍

In terms of its impact on cash flow, AP directly influences cash flow by tracking transactions and the money a company owes its suppliers, ensuring accurate bookkeeping. Delaying payments can temporarily help your business hold onto cash longer, while early or on-time payments means cash is leaving your account sooner, which reduces liquidity.

‍

That’s why good AP management is all about timing. For example, if you negotiate more time to pay your suppliers, it gives you a chance to collect payments from your customers first, helping avoid cash shortages. But if you pay vendors too quickly without thinking about your cash needs, it could leave your business short on funds for other expenses.

‍

In short, AP isn’t just a back-office function—it’s a strategic tool that supports financial stability and drives long-term success.

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. It represents unpaid debts to suppliers for goods and services already received, typically requiring payment within 30 to 45 days.

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).

Chapter 2: The accounts payable process and designing workflows

Understanding the accounts payable process (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.

‍

The typical steps include:

1. Receiving and verifying invoices: Invoices are received from vendors and reviewed to ensure accuracy and alignment with purchase details.
2. Approval and recording: Invoices are approved by the appropriate team or manager and recorded in the accounting system to track payment obligations.
3. Scheduling and processing payments: Payments are scheduled based on invoice due dates to optimize cash flow and issued through methods like electronic transfers or checks.
4. Reconciliation: Vendor records and company payments are compared to resolve discrepancies and ensure accuracy.

‍

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 in Chapter 5.

How AP is recorded

As stated in Chapter 1, 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. Examples include:

• Segregating duties (e.g., separating invoice approvals and payments)
• Conducting regular audits
• Requiring multiple levels of payment authorization
• Reconciling AP records with bank statements

‍

Together, compliance and internal controls protect the company by minimizing risks such as legal penalties, financial losses, and reputational harm.

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 eliminates repetitive tasks, reduces errors, 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.

Chapter 3: Challenges and skills for AP teams

Challenges and responsibilities of AP teams

The AP 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:

‍

‍

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

• Technical skills: Proficiency in accounting software (e.g., QuickBooks, NetSuite), familiarity with AP automation tools, and the ability to analyze data to identify trends and improve workflows.
• Soft skills: Attention to detail for accurate invoice processing, problem-solving abilities to resolve payment discrepancies, and strong communication skills to collaborate effectively with vendors and internal teams.
• Leadership skills: Strategic planning to optimize AP processes, fostering team collaboration for a cohesive and efficient department, and sound decision-making to address inefficiencies and implement improvements.

‍

By addressing challenges proactively and cultivating these skills, AP teams can create a more streamlined, accurate, and strategic approach to managing accounts payable.

The accounts payable turnover ratio

The accounts payable turnover ratio measures how quickly a company pays its suppliers, offering insights into financial health and cash flow efficiency. A higher ratio indicates the company pays suppliers more frequently, reflecting efficient cash flow management. Conversely, a lower ratio may signal slower payments or potential cash flow challenges.

‍

Optimizing the AP turnover ratio directly addresses key challenges faced by AP teams and strengthens overall financial management. Getting it right means:

• Improved cash flow management: A well-managed ratio ensures payments are strategically scheduled to align with incoming revenue, reducing the risk of cash shortages while meeting supplier obligations on time.
• Enhanced operational efficiency: Optimizing the ratio often involves streamlining workflows and automating processes to minimize delays and errors, creating a smoother AP process.

Chapter 4: Common examples of accounts payable expenses

Accounts payable encompasses a variety of expenses that can be grouped into operational costs, which directly support production and sales, and non-operational costs, which cover administrative or ancillary business operations. But first, here’s one simple example in action.

A simple example of AP in action

ABC Manufacturing purchases $15,000 worth of raw materials from a supplier who offers payment terms of net 30 days. Once the materials are delivered, ABC Manufacturing records the $15,000 as an accounts payable liability. This liability remains until the company pays the supplier within the 30-day window, at which point the AP account is cleared.

Operational AP examples

Operational expenses are essential for producing and delivering goods or services, directly supporting a business’s core functions:

• Raw material purchases: Costs for materials used in manufacturing products. These foundational expenses are critical for businesses in production or manufacturing.
• Transportation and logistics: Expenses for moving goods between suppliers, warehouses, and customers, ensuring an efficient supply chain.
• Assembling and subcontracting works: Payments to third-party contractors or services that assist in assembling or completing products.
• Vendor payments: Regular payments to suppliers for goods or services necessary for daily business operations, supporting the management of assets and liabilities.

Non-operational AP examples

Non-operational expenses don’t directly contribute to production but are vital for supporting the administrative and functional aspects of a business:

• Travel expenses: Costs for employee travel, including airfare, lodging, and meals for business meetings or events.
• Equipment: Payments for machinery, office furniture, or technology that support operations or administrative functions.
• Leasing: Recurring payments for office space, equipment rentals, or vehicles used in business activities.
• Licensing: Fees for software licenses, professional certifications, or regulatory permits needed to keep the business compliant and operational.

Chapter 5: Why you should use AP automation software

Benefits of automating AP processes

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:

‍

Steps to optimize AP with automation

Automated accounts payable processing can transform how your business handles payments. 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.

‍

By thoroughly evaluating these factors, you can select an AP automation tool that aligns with your business goals, enhances efficiency, and simplifies your workflows.

Don’t lag behind: Swap manual processes for AP automation

You should be able to process your invoices in seconds, not hours. With real-time data sync, automated invoice processing, and integrated payments, Ramp simplifies every step of the accounts payable process—saving you time and ensuring timely, accurate payments.

‍

Now that you’re an AP expert, it’s time to put that knowledge to work. Transform your workflow with Ramp’s AP software—because managing accounts payable should be smart, not all-consuming.