Accounts Payable: Managing What Your Business Owes Suppliers

Accounts payable (AP) represents money your business owes to suppliers for goods and services received on credit. Efficient AP management preserves cash flow while maintaining strong supplier relationships.

Recording a Credit Purchase

Purchased raw materials worth $30,000 on credit:
Dr. Purchases / Inventory $30,000
Cr. Accounts Payable $30,000

When you pay the supplier:
Dr. Accounts Payable $30,000
Cr. Cash $30,000

Payment Terms and Early-Payment Discounts

Suppliers often offer discounts for early payment. The notation 2/10, net 30 means: take a 2% discount if you pay within 10 days; otherwise the full amount is due in 30 days.

Invoice: $100,000 with terms 2/10, net 30.
If paid within 10 days: Pay $98,000; record $2,000 as Purchase Discount.
Annual cost of NOT taking the discount: approximately 36.7%.
Unless your business earns more than 36.7% elsewhere, always take early-payment discounts.

AP Ageing and Controls

Just as AR has an ageing schedule, so does AP. Reviewing it ensures:

• No invoices are paid twice (duplicate payment risk)
• All invoices are paid before late fees accrue
• Credit terms are being honoured correctly
• Disputed invoices are flagged and resolved

The AP Process (Purchase-to-Pay Cycle)

1. Purchase Order (PO) raised by the buying department
2. Goods/services received; Goods Received Note (GRN) issued
3. Supplier invoice received and matched against PO and GRN (three-way match)
4. Invoice approved and posted to AP ledger
5. Payment processed on or before due date

The three-way match (PO + GRN + Invoice) is a critical internal control that prevents payment for goods never ordered or received.

AP vs. Accrued Liabilities

AP is for invoices received. Accrued liabilities are for costs incurred but not yet invoiced (e.g., electricity used in March but the bill arrives in April). Both appear under current liabilities on the balance sheet but arise differently.

Lesson Summary

• AP records amounts owed to suppliers; cleared when payment is made.
• Early-payment discounts (e.g., 2/10 net 30) are almost always worth taking.
• Three-way match (PO + GRN + Invoice) prevents fraudulent or erroneous payments.

The Procure-to-Pay Cycle

Accounts payable (AP) represents money you owe to suppliers for goods or services received but not yet paid for. Managing AP well means taking advantage of payment terms, protecting supplier relationships, and optimising cash flow.

AP Metrics That Matter

Worked Example: DPO Analysis

Company A has AP of $45,000 and COGS of $540,000:

DPO = ($45,000 ÷ $540,000) × 365 = 30.4 days

This means Company A pays suppliers every 30 days on average — in line with standard net-30 terms. Retailers like Walmart routinely achieve DPOs of 60–90 days, effectively using supplier financing to fund operations.