Accounts payable (AP) represents money a business owes to suppliers for goods or services received. It is a current liability on the balance sheet showing outstanding vendor payments. When businesses purchase on credit, they create accounts payable entries that must be settled within the agreed terms.
Accounts payable tracks all short‑term debts owed to suppliers. This financial obligation typically requires payment within 30, 60, or 90 days depending on vendor agreements.
Understanding what accounts payable means in accounting helps maintain healthy cash flow and strong supplier relationships.
Explore how accounts payable works in practice and why proactive cash flow management matters.
In this blog, we will walk through the step‑by‑step accounts payable process, practical examples, and industry best practices. You’ll also discover the differences between accounts payable (AP) and accounts receivable (AR), the key functions and responsibilities of AP teams, and how automation can streamline workflows.
Finally, we’ll explore outsourcing options, software requirements, and the essential KPIs finance teams should track to optimise efficiency and strengthen vendor relationships.
What is Accounts Payable Process?
The accounts payable (AP) process is the end-to-end workflow a business uses to receive, verify, approve, record, and pay supplier invoices for goods or services, typically within agreed credit terms. It ensures liabilities are accurate, payments are timely, and vendor relationships and cash flow are managed effectively.
Step-by-Step Accounts Payable Process
Below is the step-by-step process mentioned for accounts payable:
1. Vendor onboarding and master data
Set up vendors through a controlled process capturing legal/tax IDs, verified bank details, and agreed terms; restrict who can create or change vendor records with approvals.
2. Purchase requisition and PO creation
Raise and approve requisitions, then issue purchase orders with quantities, prices, taxes, and delivery terms; restrict non‑PO spend to defined exceptions.
3. Goods/Services Receipt
Record goods receipt or service confirmation against the PO, capturing partials/returns; this becomes the basis for matching and accruals.
4. Invoice Receipt and Data Entry
Capture invoices from email/portal/EDI; record key fields including vendor, invoice number/date, PO, amounts, taxes, and terms; screen for duplicates.
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5. Invoice Verification and Matching
Perform 2‑way/3‑way match against PO and receipt with defined tolerances; route discrepancies and exceptions for resolution before approval.
6. Tax Coding and Compliance
Apply correct GST/VAT codes and ITC eligibility; validate tax IDs and retain supporting documents for filings and audits.
7. AP Approval Workflow
Route invoices based on thresholds and cost centers; approvers validate legitimacy, coding, budget, and receipt evidence before authorising.
8. Pre‑Payment Review
Review due dates, holds, unmatched items, and discount opportunities; exclude blocked/disputed invoices from the payment run.
9. Payment Processing
Prepare payment runs with dual control; execute via approved methods and update the sub‑ledger and bank records automatically.
10. Bank Release and Controls
Enforce segregation of duties for bank file upload and release; verify bank detail changes and high‑value one‑time payments before release.
11. Credit Notes and Disputes
Log disputes, obtain corrected invoices/credit notes, and apply credits to the right invoices; track to closure.
12. Vendor Statement Reconciliation
Reconcile vendor statements regularly to identify missing invoices, unapplied credits, or posting differences and resolve promptly.
13. Record Keeping and Reconciliation
Archive POs, GRNs, invoices, approvals, and remittances with retention schedules; reconcile AP sub‑ledger to GL and bank statements.
Related Post: Importance of Record Keeping for Businesses | 2025 (Updated)
14. Accruals and GRNI/GRIR
Record accruals for received‑not‑invoiced items at period cut‑off; monitor and clear aged GRNI/GRIR differences.
15. Month‑End Close Activities
Enforce cut‑off, apply credit notes, post accruals, resolve blocked/unmatched items, produce AP aging, and complete sub‑ledger to GL tie‑outs.
16. Compliance and Controls
Maintain segregation of duties, access controls, and audit trails; review exceptions and duplicate trends; document policy adherence.
17. Cash and Terms Optimisation
Standardise terms, prioritise by due dates and discount ROI, and align payment calendars with cash forecasts and working capital targets.
18. KPIs and Continuous Improvement
Track cycle time, first‑pass match rate, exception rate, duplicate hit rate, discount capture, GRNI aging, and on‑time payment; fix root causes and refine policies.
Accounts Payable Examples
Common AP items include supplier invoices for inventory, utility bills, and professional services. Accounts payable accounting example: A business purchases $5,000 in office supplies on 30-day terms.
The journal entry debits Office Supplies Expense and credits Accounts Payable for $5,000. When payment is made, the entry debits Accounts Payable and credits Cash. Other examples include rent payments, insurance premiums, maintenance contracts, and equipment purchases on credit.
Account Payable Process flow chart
Below is a visual representation of the standard ap process flow:
This account payable process flow chart shows each critical stage in the payment cycle.
Accounts Payable Procedures & Best Practices
Below is the list of some of the accounts payable procedures and best practices:
1. Implementing strong controls
Accounts payable procedures require segregation of duties to prevent fraud and errors. Different team members should handle invoice entry, approval, and payment execution. This separation creates checks and balances within the AP function.
2. Establishing clear policies
Accounts payable processes and procedures must be documented and communicated to all stakeholders. Clear policies define approval hierarchies, payment terms, and exception handling procedures. Written guidelines ensure consistency and compliance across the organisation.
3. Vendor Management
Maintain accurate vendor master files with current contact information and payment terms. Regular vendor statement reconciliation identifies discrepancies and prevents duplicate payments. Strong relationships with suppliers improve terms and resolve issues quickly.
4. Payment Optimisation
Best accounts payable practices include taking advantage of early payment discounts when beneficial. Schedule payments strategically to maintain cash flow while meeting all obligations. Prioritise payments based on due dates, discount opportunities, and vendor importance.
5. Regular Monitoring
Managing accounts payable requires tracking key metrics to identify improvement opportunities. Monitor days payable outstanding, invoice processing time, and error rates consistently. Regular reviews help optimise the AP process and maintain vendor relationships.
Accounts Payable vs Receivable
Accounts Payable (AP) vs Accounts Receivable (AR) represents two key sides of business transactions. While accounts payable tasks focus on settling obligations with suppliers, accounts receivable ensures timely collection from customers. Together, they form the foundation for accurate financial reporting and healthy cash flow.
| Aspect | Accounts Payable | Accounts Receivable |
|---|---|---|
| Definition | Money owed to vendors | Money owed by customers |
| Balance Sheet | Current liability | Current asset |
| Cash Flow Impact | Cash outflow | Cash inflow |
| Goal | Timely vendor payments | Prompt customer collections |
Understanding both sides helps businesses optimise working capital management. Let’s understand AP & AR Roles & Responsibilities.
Accounts Payable Functions and Responsibilities
Accounts payable (AP) ensures vendors and suppliers are paid correctly and on time. Below are the key functions and responsibilities of an AP team.
Core AP Tasks
The accounts payable tasks involve the full cycle of managing payments. Typical functions include:
- Receiving, verifying, and matching invoices with purchase orders
- Coding and routing for approval based on company policy
- Scheduling and executing payments (cheques, EFT, or online transfers)
- Maintaining vendor records and addressing payment queries
The process of invoices in accounts payable follows a structured flow:
- Invoice verification against purchase orders or contracts
- Coding expenses to the right account
- Approval routing to managers or budget holders
- Payment scheduling to ensure timely settlements
Accounts Payable Duties
The primary accounts payable duties are centred around financial accuracy, compliance, and vendor relationships. These include:
- Recording all liabilities promptly and accurately
- Resolving invoice discrepancies and payment disputes
- Ensuring payments are made within agreed credit terms
- Preventing duplicate or fraudulent payments
- Supporting month-end and year-end closing activities
Team Roles
Accounts payable roles and responsibilities depend on the size and complexity of the business.
- In larger organisations: roles are often split among specialists for invoice entry, approval coordination, vendor management, and payment processing.
- In smaller businesses: one person may handle all accounts payable functions, from receiving invoices to releasing payments.
Strong AP teams also collaborate with procurement and finance departments to improve cash flow management, vendor satisfaction, and overall financial health.
Accounts Receivable: Roles & Responsibilities
On the other hand, AR focuses on customer collections. Key responsibilities include:
- Issuing invoices to clients
- Monitoring outstanding balances
- Following up on overdue payments
- Reconciling customer accounts
Why both AP and AR matters?
Efficient management of AP and AR helps businesses strike a balance between paying obligations on time and collecting revenue without delays. This balance is critical for maintaining positive cash flow, strengthening vendor and customer trust, and supporting long-term growth.
What is AP Automation?
Accounts payable automation uses technology to streamline invoice processing and payment workflows. Automated systems capture invoice data, route for approval, and schedule payments with minimal manual intervention.
How does AP automation work?
Software extracts data from invoices using OCR technology automatically.
Automated Accounts Payable Process
The automated accounts payable process eliminates manual data entry through intelligent document capture. Systems automatically match invoices to purchase orders and flag exceptions for review.
Automate accounts payable process to reduce processing time from days to hours.
Accounts Payable Automation Benefits
Below are some of the benefits of the Accounts Payable automation:
- Faster Invoice Processing: Automated systems quickly capture and match invoices with purchase orders, helping accounts payable run smoothly without delays.
- Cost Savings: Reduces manual data entry and paperwork, lowering admin costs while improving efficiency.
- Improved Accuracy: Automation cuts down human errors in data entry, helping businesses keep accurate records for audits and compliance.
- Better Supplier Relationships: Paying on time builds trust with suppliers, which is one of the key responsibilities of accounts payable.
- Clearer Cash Flow: Real-time tracking and reports give businesses a good view of what they owe, supporting smarter cash flow management.
- Stronger Compliance and Security: Automated processes make sure every transaction is tracked and approved, helping prevent fraud and keeping to company rules.
Accounts Payable Automation Software
Accounts payable automation software integrates with existing ERP and accounting systems seamlessly. Popular solutions offer features like electronic invoice capture, approval workflows, and payment processing.
Accounts payable accounting software provides dashboards for tracking metrics and managing exceptions.
Accounts Payable System Requirements
Some of the most important features of accounts payable system requirements are stated below:
Software Selection Criteria
Choose an accounts payable system that scales with your business growth needs. Look for solutions offering multi-currency support, robust reporting, and strong security features. Integration capabilities with your existing financial systems are essential for seamless operations.
Key Features
The best accounts payable accounting and bookkeeping software includes automated three-way matching capabilities. Mobile approval options allow managers to authorise invoices from anywhere. Real-time reporting and analytics help track performance and identify bottlenecks quickly.
Outsourcing Accounts Payable
Payables outsourcing transfers AP operations to specialised external service providers. Companies leverage expert teams and advanced technology without internal infrastructure investments.
Outsourcing accounts payable allows businesses to focus resources on core activities.
Accounts Payable Outsourcing Services
Accounts payable outsourcing services cover the entire AP lifecycle from invoice to payment. Providers handle invoice processing, vendor management, payment execution, and reporting. Some offer additional services like outsource invoice processing and exception management. Accounts payable processing services can be customised to meet specific business requirements.
AP outsourcing reduces operational costs by 30-50% compared to in-house processing. Businesses gain access to experienced professionals and cutting-edge technology.
Scalability becomes easier as providers adjust resources based on transaction volumes. Improved accuracy and compliance reduce financial risks significantly.
Accounts Payable Services Providers
Accounts payable services providers offer various engagement models from partial to complete outsourcing.
Leading accounts payable outsourcing companies provide transparent pricing and service level agreements.
Accounts payable outsourcing pricing typically depends on transaction volume and service complexity.
Outsource accounts payable services to providers with proven experience in your industry. Evaluate providers based on technology capabilities, security measures, and client references. Consider providers offering dedicated account managers and customisable reporting options.
What KPIs should finance track for AP?
Track invoice processing time to measure efficiency from receipt to payment. Monitor cost per invoice to understand the financial efficiency of your AP operations. Days payable outstanding indicates how long you take to pay suppliers.
| KPI | Description | Target Range |
|---|---|---|
| Invoice Processing Time | Days from receipt to payment | 5-10 days |
| Cost Per Invoice | Total AP costs divided by invoice volume | $5-$15 |
| Days Payable Outstanding | Average days to pay invoices | 30-45 days |
| Error Rate | Percentage of invoices with errors | <2% |
| Early Payment Discount Capture | Percentage of discounts taken | >90% |
Regular monitoring helps identify trends and opportunities for process improvement.
Performance Analysis
Compare your metrics against industry benchmarks to assess performance levels. Use dashboard reporting to track KPIs in real-time and respond quickly to issues. Set improvement goals and measure progress quarterly to drive continuous optimisation.
Conclusion
To sum up, having a clear and smooth accounts payable process helps Australian businesses pay their bills on time and keep good relationships with their suppliers. It also helps control cash flow, so the business doesn’t run out of money. Using automation and tracking important numbers can make this process faster and more accurate.
Whether a company handles accounts payable internally or outsources it, understanding and improving this process is very important for financial health. Outbooks can help make your accounts payable work better so you can focus on growing your business with peace of mind.
For enquiries, email info@outbooks.com.au or call 0451 320 102.
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