What is accounts payable?

How does accounts payable work in practice?

Every supplier invoice you receive on credit adds to accounts payable the moment it is recorded, not when it is paid. Every payment reduces it. The balance at any point is simply the total of unpaid supplier invoices.

Kept properly, it tells you two useful things: how much cash is committed before you can spend anything else, and whether you are paying people on time. Kept badly, invoices are paid twice, missed altogether, or discovered in a drawer at the year end.

The process is unglamorous: record the invoice when it arrives, check it against what was ordered, schedule the payment for the due date, and match the payment to the invoice when it leaves the bank. Software that reads invoices from an inbox does most of that on its own.

A worked example

At the end of May a café has three unpaid supplier invoices: the coffee roaster for £640 due in 30 days, the dairy for £215 due in 14 days, and a £1,100 invoice for a repaired extractor fan due on receipt. Accounts payable is £1,955.

In the books each invoice was recorded as an expense (or an asset, for the repair if it was a genuine improvement) with the other side going to trade creditors. Nothing has yet left the bank.

On 3 June the café pays the dairy and the repair. Accounts payable drops to £640, the bank drops by £1,315, and the expenses are unchanged, because they were recognised when the invoices arrived, not when they were paid.

How is accounts payable different from accruals?

Accounts payable is for invoices that exist. You know the supplier, the amount and the due date. Accruals are for costs you have incurred but have not been invoiced for yet, so the amount is estimated.

Both are liabilities, and both appear on the balance sheet, but they are kept apart because one is a firm commitment and the other is an informed guess. When the invoice behind an accrual arrives, it moves into accounts payable.