Building Your Business What Is Accounts Payable? Accounts Payable Explained in Less Than 5 Minutes By Kristen Rogers Kristen Rogers Kristen works as a freelance writer for The Balance covering small business topics and terms pertaining to entrepreneurship, business finance, and more. She is certified in SEO and has a background in business management, marketing, and news media. Kristen also writes lessons for an education company and has prior experience as a manager for a Fortune 100 company, with experience writing and editing various content for education, news, and business websites. learn about our editorial policies Updated on July 2, 2022 Reviewed by Khadija Khartit Reviewed by Khadija Khartit Twitter Website Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder. learn about our financial review board Fact checked by Jane Meacham Fact checked by Jane Meacham Twitter Jane is a freelance editor for The Balance with more than 30 years of experience editing and writing about personal finance and other financial and economic subjects. learn about our editorial policies In This Article View All In This Article Definition and Examples of Accounts Payable How Accounts Payable Works Types of Accounts Payable Debts Photo: kate_sept2004 / Getty Images Definition The term “accounts payable” refers to the unpaid debts incurred by a business for products or services that are provided by a third party, such as a supplier. Definition and Examples of Accounts Payable Accounts payable includes the debts owed to suppliers, vendors, businesses, and any other third party. Essentially, it is the total amount of unpaid expenses from conducting business-to-business transactions. These debts owed include the costs associated with the purchase of products and services that have not yet been paid for. For example, the inventory that a manufacturer has provided but has not received payment for would be included in accounts payable. For suppliers to receive payment, they usually provide an invoice with details about the purchase to collect the funds owed. The invoice is based on information provided on the original purchase order (PO). Once the invoice is received by a business, it is added to the liabilities section of the balance sheet as a bill under accounts payable. Many companies have a department to manage the accounts payable process. These employees are responsible for processing invoices and making sure payments owed to other businesses are accurate and paid in a timely manner. Note Smaller businesses without such a department can assign accounts payable tasks to an administrative worker or contract bookkeeper, or can use accounts payable software or automation services. How Accounts Payable Works To understand how accounts payable works, you’ll need to understand each part of the accounts payable cycle: Categorize data in chart of accountsInclude vendor purchase information in accounts payableUnderstand payment terms and methodsCheck invoices for accuracyProcess paymentsRecord payment information in the general ledger The process begins with a report known as the chart of accounts. This report includes all transactions of the business, including accounts payable, and keeps the process organized by categorizing them. The chart of accounts can be created with accounting software or can be created manually using a spreadsheet. After tracking all relevant information regarding the business’s transactions, you’ll want to narrow the focus specifically for accounts payable. This is where you need to include information about the purchases made from vendors, suppliers, or other businesses to which you owe payments. You’ll want to include all relevant information, such as invoice numbers, payment terms, product descriptions, due dates, emails, addresses, and other contact information. Here, you’ll also make sure the payment terms and methods within each invoice are understood. Note To avoid owing interest, make sure payments are being processed within the time frame outlined by the supplier in the payment terms. For example, if a supplier includes net 30 terms on its invoice, this means the payment must be received within 30 days of the invoice date. When all relevant data is collected, you’ll need to confirm the purchase order number. Make sure the invoice is accurate and matches the products and services received. If the information on the invoice does not match the products, services, or any other information in the company’s system, the invoice may be sent back to the supplier or put on hold until resolved. When all invoices are deemed accurate and correct, you’ll need to begin processing the payments. Payments may be processed via direct deposit, check, wire transfer, credit card, or by using accounting software. Once the payments are processed, they should be recorded in the general ledger or in a journal to show the payment has been made. Types of Accounts Payable Debts Accounts payable generally refers to the payments due to external vendors or suppliers, although the meaning can be interpreted differently in various industries. Businesses might categorize expenses according to their purposes within the business. For example, one business might list a contract worker’s salary under operating expenses if seen as an everyday expense necessary to operate the business, while another might list it under accounts payable if simply seen as payment to a third party. When considering all transactions your businesses conducts with other businesses and third parties, the types of debts that may be listed under accounts payable may include payments owed for products and services, such as: InventoryProduction materialsServices for maintenance and repairsFreight billsTravel expensesPurchasing card billsRecent capital assets purchasesLegal feesConsulting feesSpecial projects expert fees Note Tracking accounts payable expenses can help businesses avoid paying added interest, maintain a good working relationship with suppliers, and it can help provide insight about their overall financial standings and cash flow. Key Takeaways Accounts payable refers to the debts a business owes to suppliers, vendors, or other third parties that have not yet been paid. It is listed as a current liability on the balance sheet.Invoices are commonly used for accounts payable to show products or services provided by a third party. Invoices list important details, such as the cost, payment terms, purchase order number, services or products provided, and contact information.The types of transactions that are recorded as accounts payable include bills such as inventory purchases, production materials, services provided for maintenance and repairs, and travel expenses. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Intuit QuickBooks. "A Business Owner's Guide to the Accounts Payable Process." Accessed Sept. 15, 2021. Intuit Quickbooks. "What Is Accounts Payable?" Accessed Sept. 15, 2021. Intuit QuickBooks. "Accounts Payable: Definition, Example, and Journal Entry." Accessed Sept. 15, 2021.