Accounts Payable (AP)

Accounts payable (AP) is the money a business owes to its suppliers for goods and services it has received but not yet paid for. The term covers both the liability shown on the balance sheet and the team and process that receive supplier invoices, check them, approve them and pay them on time.

Accounts payable is the mirror image of accounts receivable: one company's payable is its supplier's receivable. It is usually a current liability, since trade invoices fall due within weeks or months, and it is a major part of working capital. It is distinct from loans and other borrowings, and from accrued expenses, which are costs incurred before an invoice has arrived.

Picture a café that receives milk and coffee beans every morning but pays the dairy and roaster once a month when their bills arrive. Between delivery and payment, the café owes those suppliers money. Its list of unpaid bills, and the routine of checking each bill against what was delivered before paying, is its accounts payable.

Paying too early leaves the café short of cash for wages; paying too late angers suppliers and may bring late fees. Good payables work means paying the right amount, to the right supplier, for things actually received, on the agreed date.

In a typical company, the procure-to-pay cycle runs as follows:

1. A purchase order records what was ordered, at what price and from whom.
2. Goods or services are received and the receipt is recorded.
3. The supplier's invoice arrives on paper, by email or as an electronic invoice.
4. AP performs a three-way match: the invoice must agree with the purchase order and the receipt on quantity and price, within set tolerances.
5. The invoice is approved, posted to the payables subledger and scheduled for payment according to the supplier payment terms.
6. Payment is made in a payment run by ACH, wire, cheque, virtual card or another rail, and the payable is cleared.

The accounting under accrual accounting uses two journal entries. When a $10,000 invoice for materials is approved:

When the invoice is paid, accounts payable is debited $10,000 and cash is credited $10,000. If goods arrive at the period end before the invoice, an accrual is recorded so the liability and cost appear in the right period; this is a routine step in the month-end close.

Terms are often written in shorthand. "Net 30" means pay within 30 days; "2/10 net 30" means the buyer may take a 2% discount if it pays within 10 days, otherwise the full amount is due in 30. Whether to take the discount depends on its implied annual cost:

• $d$ is the discount as a decimal (0.02 for 2%).
• $N$ is the full payment period in days (30).
• $D$ is the discount period in days (10).

For 2/10 net 30 this gives $\frac{0.02}{0.98} \times \frac{365}{20} \approx 0.372$, or about 37% a year. A buyer that can borrow well below that rate usually takes the discount; one short of cash may not. The choice affects days payables outstanding and the cash conversion cycle, and treasury builds payment runs into its cash forecasting.

Laws limit how long buyers can stretch suppliers. In the United Kingdom, the Late Payment of Commercial Debts (Interest) Act 1998 lets suppliers claim statutory interest, set at 8% above the Bank of England base rate for business-to-business debts, unless the contract provides another remedy. In the European Union, the Late Payment Directive (2011/7/EU) sets default payment periods and limits on contractual terms, particularly for public authorities; a 2023 proposal to replace it with a regulation imposing a general 30-day cap had not been adopted as of 2026.

Because AP releases money, it is a frequent target for fraud. Common schemes include fake invoices from fictitious suppliers, duplicate payments, and requests to change a genuine supplier's bank details, a form of payment diversion fraud often run through business email compromise. Standard controls include:

• Segregation of duties. Different people set up suppliers, approve invoices and release payments, enforced through access control in the system.
• Supplier master checks. Any change of bank details is confirmed by calling the supplier on a number already on file, and bank account verification services can check that the account belongs to the supplier.
• Duplicate detection. The system flags invoices with the same supplier, number or amount.
• Reconciliation. Supplier statements are compared with the payables ledger, and paid amounts are agreed to the bank through bank reconciliation.

Automation is reshaping the function. ERP systems and AP tools read invoices automatically, match them and route approvals. Electronic invoicing mandates are spreading: India requires e-invoicing for many businesses under its GST system, and the EU's VAT in the Digital Age package, adopted in March 2025, makes structured e-invoicing compulsory for most intra-EU business-to-business supplies from 1 July 2030. Large groups often centralise payables in a shared service centre and send supplier payments from a single payment factory.

• GOV.UK: Late commercial payments
• EUR-Lex: Directive 2011/7/EU on combating late payment in commercial transactions