What it means
Accounts payable, or AP, is the total of vendor bills you've received and approved but haven't paid. It's a liability, which in accounting means an amount the company owes to someone else. Your AP is the mirror image of your vendor's receivable.
When a bill arrives and is approved, you record it. The expense goes to the month the work was done, and accounts payable goes up. When you pay, cash and payables both go down, and the expense isn't recorded a second time.
This is accrual basis accounting at work. Booking the bill when it arrives puts the cost in the right month and shows cash that's already committed, even though it hasn't left the bank. At each close, the payables balance should match the open bills in your bill-pay tool, and an AP aging shows what's coming due.
Acme's design agency finishes work in March and sends a $3,200 bill, payable in 30 days. Acme approves it in March, so March's P&L carries $3,200 of professional fees and the balance sheet shows $3,200 owed. In April Acme pays. Cash and payables each drop by $3,200, and April's P&L doesn't change.
A cost you've incurred but haven't been billed for yet belongs in accrued expenses instead. Card spend usually runs through a credit card liability account. Anyone reading your balance sheet looks at payables next to cash to see how much of the cash is already spoken for.
Why it matters. Booking bills when they arrive, not when you pay them, puts each cost in the right month and shows what cash is already spoken for.
Try it with your numbers
Change any number. The working below updates as you type.
DPO = Average payables ÷ Cost of revenue × Days in the periodFor the same period.
90 for a quarter, 365 for a year.
Your payment terms.
Days payable outstanding
70.0 days
How it’s worked out
- 1Average payables($60,000.00 + $80,000.00) ÷ 2$70,000.00
- 2Cost of revenue per day$90,000.00 ÷ 90 days$1,000.00
- 3DPO$70,000.00 ÷ $90,000.00 × 9070.0 days
- 4Payables at 30 days$1,000.00 × 30 days$30,000.00
- 5Float beyond 30 days$70,000.00 − $30,000.00$40,000.00
DPO is a ratio, not a GAAP figure. Many startups divide by all bills entered rather than cost of revenue, because most of their payables are operating expenses; say which you used. Paying late to stretch DPO costs vendor goodwill.
The entry, worked
Acme receives and approves a $3,200 bill from its design agency for work done in March, payable in 30 days.
| Account | Debit | Credit |
|---|---|---|
| Professional fees | $3,200.00 | |
| Accounts payable | $3,200.00 | |
| Total | $3,200.00 | $3,200.00 |
March carries the cost; when Acme pays in April, the entry is a debit to Accounts payable and a credit to Cash.
Common questions
What's the difference between accounts payable and accrued expenses?
Payables are bills you've received. Accrued expenses are costs you've incurred but haven't been billed for yet. Both are liabilities.
Do credit card charges go through accounts payable?
Usually not. Card charges are recorded against a credit card liability account, and paying the card statement clears that account.
What's a three-way match?
Matching the bill to the purchase order and to proof the goods or service arrived before it's approved. Small teams often use a two-way match, bill to contract or approver, and that still catches most duplicate and inflated bills.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- Accounts payableWhat we owe vendors for bills already receivedGlossary
- W-9s and backup withholding: a vendor onboarding guideWhen to ask for a W-9, how IRS TIN matching works, and what happens when a vendor won’t give you one: 24% backup withholding, owed by you.Guide · 6 min
- Balance sheet explained for startupsAssets equal liabilities plus equity. What each startup line means, from deferred revenue to the SAFE and the accumulated deficit, and why it must balance.Guide · 7 min
- Cash flow statement explained: why profit isn’t cashHow the cash flow statement starts at net income, adds back non-cash costs and working capital, splits three activities and ties to the balance sheet.Guide · 5 min
- General ledger and double-entry bookkeeping, explainedHow double entry works: journal entries, debits and credits, normal balances, running balances, the trial balance, and why posted entries are reversed.Guide · 6 min
- Chart of accounts for startups: a starting templateA starting chart of accounts for a US startup: number ranges, the expense accounts you need, and when to add an account versus a class or tracking tag.Guide · 6 min
- Payroll journal entries, from gross to netGross wages, employer taxes, withholding and net pay as journal entries: what each payroll run books, how to accrue it at month end, and where benefits go.Guide · 6 min
- Accounts payable process for startups: intake to paymentHow a bill moves from inbox to paid: intake, coding, approval, scheduling and recording, plus AP aging and who approves what at a 10-person startup.Guide · 7 min
- How to pay vendors: ACH vs wire vs check vs cardACH, wire, check or card: what each payment rail costs, how long it takes, where the fraud risk sits, and how each payment is recorded in the books.Guide · 6 min
- Accrued expenses vs accounts payable: the differenceAP is a bill you’ve received; an accrued expense is a cost incurred before the bill arrives. When to accrue, and how reversing entries work, by example.Guide · 5 min
- Vendor payment terms and early-pay discounts, explainedWhat Net 30 and 2/10 net 30 really mean, the annualized cost of skipping an early-pay discount, and how to schedule payment runs around your cash.Guide · 6 min
- What to put on an invoice: a field-by-field guideThe fields a B2B invoice needs to get paid on time: legal names, a numbering sequence, dates, terms, tax lines, PO and remit-to, and how to fix one.Guide · 7 min
- Payment terms explained: Net 30, discounts and late feesHow to choose payment terms, count a due date, price an early-payment discount, set lawful late fees and work with enterprise procurement.Guide · 6 min
- Debits and creditsDebit means left and credit means right. Not good and bad, not plus and minus. Stop translating them into signs and everything else gets easier.Lesson 4
- Recording the monthThirteen things happened to Northwind in September. Here is every one of them turned into an entry, with the reasoning that produced it.Lesson 5
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.