Accounts Payable Meaning

Accounts payables refer to the money that a business owes to its vendors in the short term. Accounts payables are listed on a business’s balance sheet as a short-term or current liability.

Accounts payables could include payments to contractors or vendors who provided goods or services to the business on credit.

Managing accounts payables is very important to the financial health of the business. Most businesses choose to use software and automation to streamline the entire procurement process.

Automate Procurement Now

Importance of Accounts Payable

When businesses don’t have enough cash on hand to immediately pay their vendors, they can pay vendors at a later date, when cash is more readily available. This amount is recorded in the books of accounts as Accounts Payable.

Managing accounts payables is an important function of the finance and procurement teams. Here’s why:

  • Timely payments ensure a healthy and improved relationship with suppliers, potentially leading to better terms, discounts, and extended credit lines.
  • Good accounts payable management improves the business’s bottom line by improving savings and reducing costs through less errors, flexible payment terms and discounts. 
  • Businesses with good procurement and AP processes enjoy better compliance, streamlined processes and better overall financial health. 

Here’s how Shark Tank’s CellBell streamlined their entire procurement process with RazorpayX Source to Pay.

Recording Accounts Payable

How Accounts Payable is Recorded

The first record of AP is in the ledger: Accounts Payable is credited and the account of the good or service purchased is debited. 

According to the rules of double-entry accounting, any transaction has to have equal debit and credit offsets.

When a purchase is made, a debit entry is made under “Purchases” (or a similar account name like “Inventory” or “Cost of Goods Sold”) to reflect the increase in goods or services received.

However, since the vendor has not yet been paid, this creates a liability. To maintain the double-entry balance, a credit entry is made under the “Accounts Payable” account. This shows the amount owed to the supplier for the goods or services acquired. These two entries, one debit and one credit, ensure financial records remain balanced and accurately reflect the impact of the transaction on the company’s assets and liabilities.

Once the payment is processed, the “Accounts Payable” account is debited and the “Cash” or “Bank” account is credited, signifying the settlement of the debt and the reduction in your liabilities.

Let’s say a bakery purchases flour from a vendor on credit. 

This is how the flour account would look in the bakery’s ledger. 

Flour A/C

      Dr                                                                                                                                          Cr

date transaction amt (Rs) date transaction amt (Rs)
25-Oct-22 To Accounts Payable 20,000


The corresponding credit entry in the AP account would look something like this:

Accounts Payable A/C

      Dr                                                                                                                                         Cr

date transaction amt (Rs) date transaction amt (Rs)
25-Oct-22 By Flour A/C 20,000


At the end of the accounting period, the bakery will transfer the total sum of money it owes to its vendors to the balance sheet as we saw earlier. 

Example of Accounts Payable Record in General Ledger

Imagine a company purchases goods worth ₹50,000 from “ABC Suppliers” on October 31, 2023. The supplier issues an invoice number INV-12345. Here’s an example of how this transaction would be recorded in the general ledger:

Date Account Debit Credit Description
October 31, 2023 Purchases ₹50,000 As per invoice number INV-12345 from ABC Suppliers
October 31, 2023 Accounts Payable (ABC Suppliers, Invoice INV-12345) ₹50,000 Amount owed to ABC Suppliers

Accounts Payable in the Balance Sheet

Condensed Consolidated Balance Sheets

Particulars June ‘22 Mar ‘22
Current Assets

Cash and Cash Equivalents

Accounts Receivable

Non-current Assets

Property, plant, and equipment

Current Liabilities

Accounts Payable

Non-current Liabilities

Term debt

Decoding Accounts Payable

In the balance sheet, businesses record the values of assets and liabilities for this accounting period and the last. 

The payables metric is also recorded in the Cash Flow Account to understand the movement of the business’s cash. A business that is able to pay its vendors in cash and on time is a business that has good cash flow. 

A high accounts payable balance means that the business has been unable to pay vendors in cash. This could be because of a number of reasons. 

  1. Insufficient cash flow
  2. Initial stages of business

There are many possible reasons for this: a lack of management of funds, high expenses, poor budgeting, slow and tedious procurement processes resulting in delayed payments and penalties.

There’s one solution: automating procurement processes. 

Automate Your Payables

Accounts Payable Workflow Process

Accounts payable is a part of the larger procurement process. Read more about the procure to pay process here. 

The accounts payables process includes:

  1. Invoice capture: Once an invoice is received from the vendor, its details need to be entered into the system. If done manually, this is a tedious, error-prone task. Automated solutions use OCR technology to auto-capture this information, ensuring 100% accuracy.
  2. Invoice approval: The next step is to get the invoice approved from department heads and the finance teams. This step too, is best when automated. Approval workflows allow all stakeholders to view and approve the invoice without delays.
  3. Payment approval: Once the invoice is approved, the payment must be approved. All details in various documents like the GRN, PO and the invoice must be verified in a comprehensive 3-way matching process.
  4. Payment disbursal: Finally, the payment is made to the vendor and recorded in the books of accounts. With solutions like RazorpayX Source to Pay, businesses can make thousands of payments at once without delays or errors.

Accounts Payable

As shown in the diagram above, the process is long, tedious, and error-prone.

Example of Accounts Payable Expenses

Accounts payable expenses encompass a wide range of costs depending on the nature of business. Here are some common examples:

1. Inventory-related purchases:

  • Raw materials used in production
  • Finished goods purchased for resale
  • Packaging materials
  • Supplies used in daily operations

2. Services:

  • Transportation and logistics costs (freight, shipping, delivery)
  • Utilities (electricity, water, gas)
  • Rent and property maintenance
  • Professional services (legal, accounting, consulting)
  • Marketing and advertising
  • Insurance premiums
  • Subscription fees (software, cloud services)

3. Other expenses:

  • Office supplies
  • Travel and entertainment expenses (reimbursed to employees)
  • Repairs and maintenance
  • Taxes (property, sales)
  • Interest on loans

Why Should You Automate Accounts Payable?

Automating accounts payable processes saves time and reduces manual effort by streamlining tasks such as data entry, invoice processing, and approval workflows. Automation also improves accuracy by minimizing the risk of human error inherent in manual data entry and processing.

Furthermore, automated systems provide real-time visibility into the status of invoices and payments, offering better control over cash flow and liabilities. Enhanced visibility and control not only optimize internal processes but also strengthen relationships with vendors through faster processing times and fewer errors, ultimately improving overall satisfaction.

Lastly, automated accounts payable systems offer scalability, adaptability to remote work environments, and strategic insights. They can accommodate increased transaction volumes without requiring additional resources, making them ideal for growing businesses.

These systems often include analytics and reporting capabilities, providing valuable insights into spending patterns, vendor performance, and opportunities for optimization, thereby enabling informed decision-making and driving strategic growth.

Accounts Payable Managed

RazorpayX allows for end-to-end automation for adding, tracking, and clearing invoice and TDS payments.

All you have to do is upload an invoice on the RazorpayX Dashboard or forward the invoice sent from your vendor, and we take care of everything.

  • Auto-Capture Invoice Details
    Our intelligent OCR extracts and populates all the invoice details saving you the hassle of manual data entry and reducing the possibility of errors.
  • Pay your Vendors
    You can make payments instantly via IMPS, UPI, NEFT, and RTGS or schedule them for a later date.
  • Auto-Pay TDS
    RazorpayX automatically deducts and pays the applicable TDS before the due date. Not only that, you can view all the challans on the dashboard post-payment.

Automate Your Accounts Payable Now!


What is the difference between trade payables and accounts payable?

Though the terms trade payables and accounts payable are often used interchangeably, there are slight differences in their meanings.
Accounts payable are the accrued obligations or payments which a business owes, like leasing, electricity, labour, etc. On the other hand, trade payables are the money owed to vendors for inventory like supplies, business materials, etc.

What is the difference between accounts receivable and accounts payable?

Accounts payables is the money a business owes its creditors, while accounts receivables is the money owed to the business by its creditors, making them exact opposites. In a credit-based purchase, the purchasing business records the transaction as an accounts payable, while the vendor company records it as an accounts receivable.

Is accounts payable a debit or credit?

Accounts payable is both a debit and a credit. For double-entry bookkeeping, the accounts payable department receives an invoice which gets recorded as a credit in the general ledger and then to the expense account as an offsetting debit.

This matching principle follows the method of accrual accounting, where expenses and revenues get recorded in the same period that takes place prior to the invoice payment.

How is accounts payable a current liability?

For accounts payable, one receives an invoice for services or goods which are not yet paid. Hence accounts payable is a current or outstanding liability - a payment amount that a business owes to a vendor.

What is an accounts payable turnover ratio?

Accounts payable turnover ratio refers to a ratio which is a measure of an organisation’s short-term liquidity, namely, the average rate at which the company pays off vendors.

Essentially, this ratio is a metric that organisations use to measure the efficiency of paying a short-term debt.

A high value of the accounts payable turnover ratio implies that the time duration between receiving an invoice and making the payment is less. On the other hand, a low value of accounts payable turnover ratio indicates that the time duration between receiving an invoice and making the payment is more.

What is the role of accounts payable?

The role of accounts payable (AP) is to manage and oversee the payment of invoices and other obligations owed by a company to its suppliers or vendors. The AP department also controls budgeting and spend management.

How Do You Record Accounts Payable Transactions?

According to the rules of double entry accounting, accounts payable is recorded in two accounts. When a purchase is made, the expense account for the good or service is debited, and the accounts payable account is credited. When the payment is finally made, the entry is reversed by debiting the accounts payable account and debiting the cash account.

What is the AP Workflow Process?

The AP workflow process starts with capturing details of the invoice provided by the vendor, followed by getting the invoice approved. Once the invoice is approved, the payment must be approved before disbursing the payment.

What is an Accounts Payable System?

An accounts payable system (APS) is a software application designed to automate and streamline the management of a company's obligations to its suppliers. An APS is a valuable tool for businesses of all sizes to manage their accounts payable effectively and efficiently.

How Do You Process an Invoice for Accounts Payable?

Invoices are received from the vendor either on email or physically. Once received, the procurement team enters invoice details into the system and verifies accuracy of the invoice against the GRN and PO. After this, the invoice is approved by all department heads and processed for payment.

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    Raghavi Kasa
    Author Raghavi Kasa

    Raghavi likes to think that because she writes for a living, she'd be good at writing a short bio for herself. But she isn't. She is good at binging K-drama, though.

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