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What is Accounts Payable?

By Sarah D. Hunt
Updated May 17, 2024
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"Accounts payable" (AP) is a term that refers to the money that a person or business must pay to its creditors within a certain period of time. It is the unpaid invoices, bills or statements for goods or services rendered by outside contractors, vendors or suppliers. These debts often must be paid — either partially or in full — each month. When someone pays his or her monthly electricity, telephone, cable television and Internet service provider bills, for example, he or she is paying off his or her accounts payable obligations. The term "accounts payable" also is the term that is used to refer to the unit within an organization's accounting department that manages these payments.

Accounting Processes

The accounts payable unit in an organization often oversees a variety of tasks. These might include authorizing purchase orders, collecting credit card receipts, organizing account withdrawals, keeping the general ledger and auditing expense reports. Other accounting transactions that an organization's accounting department might manage include accounts receivable (AR), which focuses on the billing of customers, and the organization's payroll, which focuses on paying employees.

Transaction Conditions

Each business transaction has specific terms and conditions, including those that concern the payment for a good or service. Some transactions require payment upon receipt, which means that compensation is due immediately after the good is delivered or the service is rendered. Others might have 10-day, 30-day, 90-day or other time frames during which payment is expected. The use of credit lines, which allow the customer to make regular payments toward outstanding balances while continuing to receive goods or services, also is a standard practice. The accounts payable administrator must keep track of all terms and conditions and follow them accordingly.

Default

If an organization does not satisfy its accounts payable obligations, it is considered to be in default. This can harm the organization's credit rating and could ultimately lead to bankruptcy. The same is true for a person who does not pay his or her bills. When an organization or person is in default, the party that is owed money usually will end delivery of all goods and services and could pursue legal avenues to receive payment or the return of goods that had been delivered.

Duties of Administrators and Employees

The job of the accounts payable administrator in an organization is a serious responsibility. Paying bills on time and according to the required terms and conditions can affect the organization's credit ratings and business relationships. Someone who works in accounts payable should be organized and attentive to details. It is often necessary to answer questions from vendors or coworkers in other parts of the organization, so good communications skills are helpful. Many people who do not work in accounting find the procedures and requirements complicated and confusing, so the ability to explain these clearly and patiently can be very useful.

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Discussion Comments
By anon202112 — On Aug 01, 2011

DPO = difference between holding the stock and selling it plus the difference between selling the stock and and the payment days. The sum of these two should give the DPO.

By anon89608 — On Jun 11, 2010

Accounts payable is a process by which a buyer pays the vendor for using the goods and services on credit.

By anon37080 — On Jul 16, 2009

what is a payment contractor/accounts receivable? a couple of business want people to send payments to cut on international cost. questions like this were asked for qualifications 2) Will you be able to process every payment on time when they get delivered to you..?

3) How long have you been Banking with your bank and have you for once had Issues with your Bank or Account..? ( Meaning do you have a cordial relationship with your Bank )

4) Can you cash up to $5000 - $10,000 in your bank..? Though you will be receiving payment below $3000.00 for a start

5)Is your Account in good standing.... What is your Account Balance at this point?

does this seem legitimate

By MarySchaeffe — On Apr 15, 2009

I agree that accounts payable can be a strategic value added function - if and when it is handled correctly. I am really pleased to see the growing acknowledgment of that within the business community. Let's hope it continues.

Mary Schaeffer

Accounts Payable Now & Tomorrow

author Controller & CFOs Guide to Accounts Payable, Fraud in Accounts Payable

By anon20004 — On Oct 23, 2008

what is accounts receivable?

By anon19270 — On Oct 09, 2008

Accounts payable is an obligation of one party to another or in short, unpaid bills. Accrued expenses are expenses incurred but not yet paid. In one way, they are similar but they are not the same. How could you differentiate AP to AE? What is the cut-off point to determine that this transaction is an AP or AE. Tnx

By MarySchaeffe — On May 07, 2008

The explanation above is accurate but glosses over some of the problems that can occur if proper attention is not paid to the accounts payable function. Most specifically if care is not taken the organization opens itself up to duplicate payments and fraud. The care includes among other things proper segregation of duties, use of coding standards and appropriate payment processes.

Mary Schaeffer

author The Controller & CFO's Guide to Accounts Payable (John Wiley & Sons) and twelve other business books

editorial director Accounts Payable Now & Tomorrow

By Jacqumay — On May 11, 2007

Hello,

Are there other methods to calculate DPO? The one I am used to is Accounts Payable/COGS X the number of days.

Is there another formula I could use to get to the average day it is taking to pay a vendor?

What are all the DPO Methods? Anyone?

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