What Is Accounts Payable?
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- Accounts payable is the money a business owes its suppliers for goods or services it has received on credit and has not yet paid for. In B2B, a supplier invoice bought on terms such as net 30 sits in the buyer's accounts payable until it is paid. It is the buyer's side of the seller's accounts receivable.
How it works
Accounts payable is the record of what a business owes on open supplier invoices, the mirror image of accounts receivable. The same $5,000 invoice is a receivable for the seller and a payable for the buyer until the buyer pays it.
The US Treasury's Bureau of the Fiscal Service describes commercial accounts payable work in terms of invoices: its invoice platform automates purchase orders, invoice collection, validation and approvals. The Prompt Payment rules that federal agencies follow (5 CFR part 1315) list the documents behind every payment:
How a payable moves to payment under the federal Prompt Payment rules
The buyer authorizes the purchase with a contract or purchase order that the supplier's invoice will reference.
The buyer records what was delivered, the quantities received and the dates the goods were delivered and accepted.
The supplier's invoice names the vendor, the invoice date, the order reference, the items, prices, quantities and payment terms.
The invoice is validated against the payment documentation, the order and the receiving record, then approved.
The invoice is paid by its due date, or as close as possible to the discount date when a cash discount is taken.
Under those rules, unless the contract sets other dates or a discount is taken, payment is due 30 days after the payment period starts, usually the date a proper invoice is received. Agencies should pay no more than seven days before the due date.
Accounts payable vs. accounts receivable
- Accounts payable: money your business owes its suppliers. For a distributor, it is the open bills from the manufacturers it buys from.
- Accounts receivable: money your customers owe your business. For the same distributor, it is what contractors and dealers owe on open invoices.
On the balance sheet
For companies that file with the SEC, Regulation S-X lists accounts and notes payable under current liabilities, when appropriate. It requires amounts payable to trade creditors to be stated separately from amounts payable to banks, related parties and others.
When a payable becomes a tax deduction depends on your accounting method. Under an accrual method, you generally deduct or capitalize a business expense when all events have occurred that fix the liability, its amount can be determined with reasonable accuracy, and economic performance has occurred. Under the cash method, you generally deduct expenses in the tax year you actually pay them. This is general information, not accounting or tax advice.
Example
A building products distributor buys $10,000 of fittings from a manufacturer on net 30 terms. Its accounts payable rise by $10,000 when the invoice is recorded.
The manufacturer also offers a 2% cash discount for payment within 10 days. The IRS describes cash discounts as amounts your suppliers let you deduct from your purchase invoices for prompt payments. If the distributor pays on day 8, it pays $10,000 x 0.98 = $9,800, and the payable is cleared. If it waits until day 30, it pays the full $10,000.
On Shopify
On Shopify, you usually sit on the other side of your buyers' accounts payable. Shopify B2B, on the Basic, Grow, Advanced and Shopify Plus plans, lists net terms, PO numbers and payment reminders among its features. B2B customers can log in to customer accounts, select an order and pay it by clicking Pay now any time up to the due date. After the terms expire they can still pay, but the order displays as Overdue.
For your own bills, Shopify Bill Pay lets you pay vendors, freelancers or any service that invoices your business. It is available only to merchants in the United States and is installed from the Shopify App Store. Your vendor receives a bank transfer or a paper check, and you can pay domestic bills by bank transfer, business credit or debit card, or your Shopify Balance account.
How Uncap helps
Uncap's guide to Shopify net terms covers the buyer's purchase order number: it comes through with the order in your Shopify admin and appears on any invoices generated from it, a standard requirement for an enterprise buyer's accounts payable workflow. Uncap Portal puts NET terms, invoices, and payments in the portal, so buyers can pay on terms, view invoices, and settle balances in one place.
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Frequently asked questions
What's the difference between AP and AR?
AP, accounts payable, is money your business owes its suppliers. AR, accounts receivable, is money your customers owe your business. One unpaid invoice is a payable for the buyer and a receivable for the seller until it is paid.
What does accounts payable do?
The accounts payable function records supplier invoices, checks them against the purchase order and the receiving record, gets them approved and pays them by the due date. The US Treasury's accounts payable service, for example, covers commercial invoice processing with voucher examination and compliance with Prompt Pay regulations.
What is the accounts payable process?
The accounts payable process runs from purchase order to payment: the goods are received and recorded, the supplier sends a proper invoice, the invoice is validated and approved, and it is paid by the due date or the discount date.
