What is accounts payable?

In plain English

Accounts payable (AP) is a liability. It rises when you enter a bill and falls when you pay it. The balance at any date should equal the total of your open, unpaid bills.

A clean AP process means every bill is entered once, approved before payment, and tied to a vendor. Month-end, the AP balance on the balance sheet should match the open bills report.

Why it matters

Your bank balance does not tell you what you can spend. If you have unpaid bills sitting in a drawer or an inbox, the cash in checking is already partly spoken for. Tracking payables shows the real amount left after you settle what you owe, so you do not buy equipment or take a draw with money that belongs to a supplier.

Payables also shape your reputation with vendors. Paying late can cost you early payment discounts, add late fees, and make suppliers ask for cash up front. A lender reviewing your balance sheet will look at how large payables are compared with cash.

Worked example

You receive a $1,800 supplier bill on June 5 and pay it on July 3. On June 30 your accounts payable includes that $1,800. After you pay it in July, AP falls by $1,800 and cash falls by $1,800.

How to handle it

1. Enter each vendor bill when it arrives, with the bill date, due date and the vendor's invoice number.
2. Attach the PDF or photo of the bill to the entry so anyone reviewing it can see the source.
3. Once a week, sort open bills by due date and pick which ones to pay in the next run.
4. When you pay, apply the payment to the specific bill instead of recording a new expense.
5. At month end, run the payables aging report and confirm its total matches the payables line on the balance sheet.

Common mistakes

• Recording the payment as a fresh expense instead of applying it to the bill, which counts the cost twice and leaves a phantom open bill.
• Entering the same bill twice, once from the emailed copy and once from the paper copy, which can lead to paying a vendor twice.
• Skipping bills for small amounts, so the balance sheet understates what you owe and your cash plan looks better than it is.
• Ignoring vendor statements, which means missed or misapplied payments go unnoticed until the vendor sends a past due notice.

Not the same as: Accounts receivable

Accounts payable is what you owe to others and sits with your liabilities. Accounts receivable is what others owe you and sits with your assets. See Accounts receivable.

Go deeper

• Accounts Payable Process for Small Businesses: A practical accounts payable process: receiving bills, approving, coding, scheduling payment and avoiding duplicate payments or missed due dates.
• Vendor Statement Reconciliation for Accounts Payable: How to reconcile a supplier's statement against your payables to catch missing bills, duplicate payments, unapplied credits and pricing errors.

Related terms

• Accounts receivable: Money customers owe you for goods or services you have already delivered and invoiced.
• Accrual basis accounting: A method that records income when it is earned and expenses when they are incurred, not when cash moves.
• Write-off: Removing an amount from the books because it will not be collected or has no value.

Common questions

General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.