Payment Terms

How to set up an accounts payable process

When running a business, an effective Accounts Payable (AP) process is essential. It ensures that sellers and suppliers are paid on time and reduces waste by eliminating late fees or duplicate payments.

This article explains how accounts payable work and how it differs from accounts receivable. We will also show you how to set up your own AP process.

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What are accounts payable?

The Accounts Payable department manages the company’s payments for goods or services purchased from a vendor or supplier. You can track these liabilities on a balance sheet to monitor overdue payments and make sure there are no overdue balances.

Your AP department oversees all outgoing payments and is typically the first point of contact for vendors. Payment due dates can vary, so check individual invoices to make sure you are aware of payment dates. If payments aren’t made on time, your business could face late fees.

A term of accounts payable that you hear frequently is “overdue days” (DPO). This financial ratio measures the average number of days it takes a business to pay its vendors or suppliers. The longer it takes you to pay your suppliers, the higher your DPO.

Did you know? Accounts payable are considered a liability because they represent the money your business owes. This differs from accounts receivable, which are generally considered a business asset.

Accounts Payable vs Accounts Receivable

It’s easy to confuse accounts payable and accounts receivable, which means collecting your unpaid invoices. Although there is some overlap, accounts payable and receivable are not the same.

Accounts Payable is the money your business owes its vendors and suppliers for goods and services purchased. By comparison, accounts receivable are money owed to your business, usually by its customers. And while accounts payable are considered a liability, accounts receivable are considered an existing asset.

Accounts Payable and Accounts Receivable are crucial aspects of the accounting process and work together to keep your business running smoothly. Both should be recorded to ensure accuracy and to track when outgoing and incoming payments are due. Without making a profit, your business will be unable to meet its financial obligations.

Final resultConclusion: Accounts Payable is about the money your business owes, while Accounts Payable is about the money you owe your business.

Examples of accounts payable

Here are some examples of accounts payable:

  • Equipment
  • Rental
  • Subcontracting services
  • Raw materials
  • Traveling
  • Stationery

Did you know?Did you know? There are two types of debt: trade payables and accrued liabilities. Trade payables represent the purchase of physical goods, while trade payables refer to the purchase of expensed services, such as travel or supplies.

How to set up an accounts payable process

It is important to record all purchases in your AP service as soon as they are made. Once the accounts are paid, the balances will no longer appear in accounts payable.

Let’s take a step-by-step guide to setting up an accounts payable process.

1. Create a chart of accounts.

Before you do anything else, you need to create a chart of accounts to track your transactions. You can easily create one in Excel or a similar program.

A chart of accounts should contain the following information:

  • Names of suppliers
  • Account and invoice numbers
  • Date of invoice
  • Type of expense
  • Payment term and status

2. Configure your suppliers.

Next, create a spreadsheet with a list of your suppliers. Here you can detail exactly how each supplier is paid and when payment is due.

Maintaining a strong relationship with suppliers will help your business in the long run. This will also ensure that no problems will arise while purchasing their goods or services.

Make sure you enter the correct payment terms. Some sellers will offer a discount if the invoice is paid in full by a certain date. This is called Net D. Terms will change depending on your agreement with the seller.

For example, a 2% net 30 would offer a business a 2% discount if the invoice is paid within 30 days. If your vendors don’t currently offer this, check with them and see if that’s an option. It is an incentive for both the company and the supplier to ensure smooth and on-time payments.

3. Receive invoices from suppliers.

Once you receive an invoice, review it to make sure there are no errors. Enter the invoice information after confirming that all goods have been posted. The only exception would be if a supplier provided a service instead of a product.

Match the invoice to the purchase order to verify that everything is correct. Once the invoice is paid, you may not be able to turn around and make corrections to the order.

4. Process payments for unpaid invoices.

Check your AP at least once a week to make sure there are no unpaid bills. You want to stay on top of payments to avoid penalties, such as interest and late fees, on unpaid bills. There are many ways to pay your bills, so it’s always best to see which method a specific vendor prefers.

Accounting software can help avoid forgetting when making payments. You can also set up payment alerts to make sure there are no unpaid invoices. Any additional action you can take to pay on time is highly recommended.

How Accounting Software Can Help Manage the Accounts Payable Process

There are many benefits to using accounting software for your accounts payable process. Online accounting software facilitates electronic payment of invoices and avoids late penalties.

Plus, having everything in one place makes it easier to track and manage your accounts. Handling everything manually leaves too much room for human error.

By using accounting software, you can automate your accounts payable process to avoid late payments. You can also link bank and credit card accounts so you don’t have to enter this information manually. In addition, the accounting software provides a virtual paper trail in the event of a discrepancy. All in all, the right software will save you time and energy.

There are many popular accounting software to choose from. Here’s a look at three of the best accounting software you’ll come across at the start of your research.

adviceAdvice: For more information, read our full reviews of all the best accounting and invoicing software so you can choose the solution that best meets your needs.


QuickBooks is one of the best-known accounting software, and for good reason. QuickBooks has options for businesses of all sizes, and it’s easy to get started. While there’s a learning curve if you don’t have any previous experience with QuickBooks, the company does offer video tutorials to make the process easier.

You will need to decide if you want the online or desktop version of QuickBooks. With an online account, you can access your information from anywhere. With the desktop version, you can access your data only on your computer. Sharing options are limited, which can be problematic if you need to share information with your accountant. Learn more in our comprehensive QuickBooks review.


Wave is an often overlooked option for accounting software, but it’s a great choice for small businesses and freelancers. The company offers cloud-based accounting software, and there are no monthly fees, setup fees, or hidden fees.

While Wave is a great option for new business owners or anyone on a tight budget, it won’t be the right software for everyone.

Wave has limited tracking and inventory, so it may not have the features that large businesses and businesses need. Its app integrations are also limited compared to some of its bigger competitors. Read our Wave review for more information.


Xero offers a cloud-based monthly subscription service, and it’s our pick as the best option for growing businesses. The company offers a wide range of services, including the following:

  • Accounts payable
  • Buy online
  • Expense

Xero integrates with over 700 different applications, such as and ADP. Additionally, Xero offers flexible pricing for businesses at different stages of growth.

Xero’s Advance Plan starts at just $ 11 per month and is a great option for solopreneurs, freelancers, and new business owners. The company offers a 30-day free trial, so you can be sure that Xero is the right fit for you. Our full Xero review has more information.

for your informationFOR YOUR INFORMATION: The best accounting software allows you to process payments automatically and avoid late fees and other common business accounting mistakes.

An AP process streamlines accounting

All businesses, regardless of size or industry, should be familiar with the accounts payable process. You need to know when unpaid invoices are due to avoid late fees or strained relationships with your suppliers. If you are building your own AP process, using the right feature-rich accounting software can help you avoid many common problems.

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