As your business grows, keeping up with payments to suppliers, service providers, and employees is essential. Tracking accounts payable helps maintain cash flow, smooth operations, and strong relationships, and the right accounting software can streamline the process and prevent costly errors.

Today, digital financial tools make it easier to stay on top of accounts payable, but a 2023 QuickBooks survey found that 86% of Canadian small and mid-size companies have outgrown the financial applications they use—including their accounting software.

If you’re relying on outdated financial tools, you could be holding back your AP process without realizing it. Let’s explore why scalable accounting software matters, how tools like QuickBooks Online help businesses expertly manage AP and why it’s worth upgrading before any bottlenecks start costing you time and money.

Table of Contents

• What is accounts payable?
• Accounts Payable Turnover Ratio Formula
• The Accounts payable process
• Accounts payable examples
• Accounts payable vs. accounts receivable
• The role of accounts payable
• Managing accounts payable effectively
• Easily manage money in and out
• FAQ

What is accounts payable?

Accounts payable, put simply, is the total amount of money that your business owes to its suppliers or creditors. Watching your accounts payable closely is essential for managing your cash flow.

Accounts payable is like a running "tab" with your creditors or suppliers. It's the total amount your business owes for goods or services it has received but hasn't paid for yet. In short, it works much like a company credit card: you purchase what you need now and pay the bill later.

Since accounts payable is money your business hasn't spent yet, you may be wondering: is accounts payable an asset? The answer is no—it’s a liability because it represents money your business owes to others rather than money it owns.

But accounts payable is more than simply an IOU—it shows how much money a company owes in the short term. These amounts are usually spread across different divisions and suppliers, making the timing and precision of your payments crucial. Generally, you should pay your accounts payable within a year to suppliers who have sold you goods or services you need to keep your company on track. 

Accounts payable, as a result, affects almost every aspect of running a business and making decisions as a leader, whether it's for office supplies, inventory, professional services, or bigger contracts like IT infrastructure and logistics.

Accounts Payable Turnover Ratio Formula

The accounts payable turnover ratio helps you measure how efficiently your business is paying its suppliers. It’s calculated as:

Accounts Payable Turnover Ratio=Total Net Credit Purchases/Average Accounts Payable

A higher ratio indicates faster payment to suppliers, while a lower ratio may suggest slower payment or cash flow constraints. Tracking this ratio helps you balance timely payments with keeping enough cash on hand for operations.

The Accounts payable process

Although every company handles accounts payable (AP) a bit differently, the main steps of the process are basically the same. Adopting a consistent approach keeps your records accurate, your payments on time, and your relationships with suppliers strong. 

1. Make purchases: Buy goods or services from your suppliers.
2. Receive invoices: Get the invoice from your supplier for the products or services you purchased.
3. Verify details: Compare invoices to packing slips and purchase orders.
4. Approve payments: Authorize payments to suppliers internally.
5. Record payments: Enter authorized payments into your accounting ledger.
6. Issue payments: Issue your payments by cheque, electronic system, or electronic funds transfer (EFT).

This AP clearance process takes longer if your invoices tend to be passed back and forth between departments within your company—which can frustrate your suppliers.

Completing these steps correctly depends on how accurately you do your journal entries, the backbone of double-entry accounting and a key part of keeping your books balanced.

Pro Tip: Accounting software like QuickBooks can standardize your AP process from end to end across all your divisions, helping you prevent payment bottlenecks.

Accounts payable examples

Accounts payable (AP) covers far more than the invoices you receive from your suppliers. It represents all the short-term obligations your business takes on—everything from day-to-day expenses to larger operational costs. For most businesses, these obligations can add up quickly, which makes keeping track of them so important.

Here are a few typical examples:

• Invoices from suppliers for raw materials, finished goods, or services
• Fees for consultants or contractors (for marketing or IT support)
• Utility bills for phones, internet service, water, and electricity
• Subscription fees for cloud services or software platforms
• Professional fees for legal, HR, or accounting services
• Lease payments for office, warehouse or retail space
• Equipment maintenance and repair costs

Until you pay these amounts, all of them appear as liabilities in your general ledger. To make sure you know when these obligations come due, you need to promptly and accurately record them.

Accounts payable vs. accounts receivable

The primary difference between accounts payable and accounts receivable is the impact on your company's cash flow. 

While accounts payable represents the amount your business owes, accounts receivable is money customers owe your business for goods or services. 

Unlike accounts payable, which signals an upcoming cash outflow, accounts receivable represents an inflow of cash that the business expects to collect. 

The balance sheet clearly represents these differences: Accounts payable is listed under liabilities as an obligation that needs to be settled, while accounts receivable is listed under assets because it's expected to bring in cash. 

Understanding the difference between accounts payable and receivable is crucial for managing a working capital of a business and ensuring a healthy cash flow.

For small and medium-sized companies, it all comes down to balancing what you owe and what you're owed—a fundamental aspect of financial management for any business.

The role of accounts payable

Because accounts payable is a liability, it impacts cash flow and supplier trust if not managed carefully. Maintaining these records is a proactive way to manage your business’s financial obligations.

Let’s look at how accounts payable plays a role in key areas of your business—from cash flow to expenses and even taxes.

Managing cash flow

Timing is essential for managing cash flow when it comes to accounts payable. When you extend payment terms, you can free up money for other projects. However, if you delay your payments for too long, you may have to pay late penalties and hurt your relationships with suppliers. 

Tracking expenses

By keeping track of your expenses (and, in turn, your payables) accurately, you can determine how much it really costs to run your business and avoid overinflating your profits. 

Avoiding tax problems

If your AP records are incomplete or inaccurate, you may have tax problems, including disputes, audits, and even legal issues. If the Canada Revenue Agency (CRA) audits your business, accurate records give you an audit trail you can use to back up your claims.

Keeping accurate records of your payables is also crucial for claiming tax deductions. If you overestimate or understate your expenses due to inadequate or incorrect AP records, it could harm your claims.

Maintaining supplier relationships

If you pay your suppliers on time, they are more likely to give you better service, payment terms, or discounts. On-time payments show suppliers that you’re reliable, which strengthens your relationship and builds trust, which can lead to more favourable credit terms, priority treatment during busy periods, or early-payment discounts that improve your bottom line. 

Managing accounts payable effectively

Managing your accounts payable may seem like a balancing act, but it plays a pivotal role in the cash flow management of most medium-sized companies.

Why? Because how and when you pay your bills affects your cash flow—the lifeblood of your business.

Paying accounts payable too early might strain your cash reserves, but paying too late might damage relationships with suppliers or lead to late fees.

Managing your accounts payable effectively can help you maintain a healthy cash flow, providing the funds you need to grow your business.

With QuickBooks Online Advanced, you can better track and manage payables, ensuring a healthier cash flow for your business. 

Easily manage money in and out

Staying on top of accounts payable is difficult to do manually, but the right financial management software can simplify the process by organizing your records, scheduling your payments, and tracking your expenses—exactly what QuickBooks is built to do.

QuickBooks can help you accurately record and track all your payables and expenses, making it easier for you to claim deductions when it’s time to file your small business tax return.

You can also use insightful financial reports from QuickBooks to make informed decisions and strategize effectively for future financial planning.

Get started today and discover how QuickBooks can help you keep track of your accounts payable, record your expenses, and prepare for the next tax season.

Disclaimer

Money movement services are provided by Intuit Canada Payments Inc.

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