The accounts payable process: A 5-step guide for small businesses in 2026

There are many moving parts to keep track of when taking care of your business’s accounting, and the accounts payable process is one of the most important. 

Yet, according to QuickBooks' Small Business Late Payments Report, over half (56%) of small businesses surveyed reported being owed money from unpaid invoices. 

That’s why it’s so important to have a well-defined accounts payable process. Accounts payable describes the various amounts of money your business owes to external vendors for goods and services that you have not yet paid for.

Let’s dive into the accounts payable process, including how it works, why it’s important, and ways to save time in your workflow.

Jump to:

• What is the accounts payable process?
• What is the full-cycle accounts payable process?
• How the accounts payable process works in practice
• Why is the accounts payable process important?
• Challenges in the accounts payable process
• 6 tips for streamlining the accounts payable process
• What's changed in the accounts payable process?
• Choose the best payment setup for your business.

What is the accounts payable process?

The accounts payable process is how your business handles paying its bills, from the moment you receive an invoice until the supplier is paid. Throughout the process, your team reviews invoices, matches them to purchase details, and then records payments for accurate tracking.

Accounts payable, also known as AP, refers to the unpaid amounts your business owes for goods or services you’ve already received. 

These balances often come from common expenses, such as:

• Direct purchases, including inventory, materials, or office supplies
• Services received, like maintenance, professional support, or IT work
• Additional charges, including interest or fees outlined in vendor agreements

A clear accounts payable process helps you stay on top of payment deadlines and keep financial records accurate. When you track bills consistently, you gain better visibility into upcoming expenses and can manage cash flow with fewer surprises.

What is the full-cycle accounts payable process?

While the accounts payable process focuses on paying bills, the full workflow cycle breaks everything into clear steps, from purchase to payment. Looking at the full cycle helps clarify where reviews, approvals, and payments happen.

Here’s a breakdown of the steps involved in the accounts payable cycle:

1. Purchase order created: The process begins when your business creates a purchase order (PO) to formally request goods or services, and then documents agreed pricing and terms.
2. Goods or services received: Once the vendor delivers the goods or completes the service, your business confirms that the order was fulfilled as expected.
3. Invoice received: The vendor submits an invoice requesting payment for the goods or services provided, either electronically or physically.
4. Invoice reviewed and matched: The invoice is reviewed for accuracy and matched against the purchase order and receipt, when applicable, to confirm quantities, pricing, and payment terms. This step is often referred to as a three-way match.
5. Invoice coded and approved: After verification, the invoice is assigned the appropriate expense or general ledger codes and routed for approval based on your internal approval rules.
6. Payment scheduled and issued: Once approved, payment is scheduled and issued according to the agreed payment terms, using the payment method selected by your business.
7. Payment recorded: After payment is made, the transaction is recorded in your accounting system, and the invoice status is updated to reflect that it has been paid.
8. Reconciliation and close: Accounts payable records are reconciled with bank statements and the general ledger to confirm accuracy and close out the payment cycle.

Step 1. Set up your chart of accounts

The first step of the accounts payable process is to create a chart of accounts, which is an organizational chart that summarizes where you record accounting transactions. 

Generally, a chart of accounts will have five primary account types: 

• Income accounts
• Asset accounts
• Liability accounts
• Expense accounts
• Equity accounts

Each account category will have different account names with an associated account number and financial statements. You can also create subcategories to further divide and make them more organized.

Step 2. Assign vendor details

Next, you should assign vendor details to help you keep track of orders and payment deadlines, then assign codes to remind you about future payments.

Here are some vendor codes you can use: 

• Net 10: Payment is due in 10 days.
• Net 30: Payment is due in 30 days. 
• Net 60: Payment is due in 60 days. 

Assigning codes organizes accounts payable processing so you know when to expect payments. Using accounting software for this step allows you to track payment terms and assign payment due dates automatically.

Step 3. Review and approve invoices

Before initiating payment, you’ll want to review your invoice for accuracy and ensure you’ve received the product or service requested. Using invoicing software, you can use the three-way match to verify the invoice before paying them. 

Here’s how the three-way match accounts payable process works: 

• Purchase order: Use this official order confirmation to verify the quantity, cost, and payment terms.
• Order receipt or goods received note: Ensure the vendor delivers the purchase correctly. 
• Invoice: Confirm the amount you owe and the payment terms. 

With QuickBooks Bill Pay, you save time chasing manual approvals and get faster approvals with workflows**. Automate your processes with custom workflows that fit your unique business needs.

Step 4. Process payment for outstanding invoices

After verifying the accuracy of your invoices, you can initiate invoice payments to the appropriate vendors. Depending on the vendor’s preference and your payment method, you may need to notify them that payment is on its way. 

Review your accounts payable weekly to ensure there are no outstanding payments and to confirm you completed the payment.

Step 5. Record payments and reconcile

Once you’ve completed these steps, it’s time to update your books to reflect the most current information. After a vendor payment has gone through, you can remove it from your list of accounts payable. Then repeat this process weekly. 

You can also automate reconciliation with accounting software to help track payments and reduce the risk of late fees.

Why is the accounts payable process important?

The accounts payable process plays an important role in your business’s accounting operations for several reasons. Let's dive into a few benefits of having a clear and consistent AP process.

Helps manage cash flow

Your AP process dictates when money leaves your business. When your business consistently records and tracks invoices, you have a much clearer view of upcoming payments and short-term obligations. This ultimately makes it easier to plan payments strategically instead of scrambling at the last minute.

A structured process allows you to:

• Schedule payments based on the exact due date
• Anticipate your near-term cash needs accurately
• Maximize working capital by timing payments strategically

Supports accurate financial reporting

Every recorded invoice feeds directly into your expense and liability accounts. Following consistent procedures for coding and recording helps you generate financial statements that accurately reflect your business's true spending and debt. This makes your life easier when you need to review your spending habits or questions during tax season or an audit.

Reduces financial risk

Without a defined process, invoices can easily be forgotten, paid incorrectly, or even paid twice. Establishing clear review and approval steps adds structure and makes it easier to catch potential issues before the money leaves your bank account.

A clear AP process helps you reduce the risk of:

• Accounting errors like duplicate or incorrect payments
• Missed invoices leading to late fees
• Errors in expense recording and tax compliance

Strengthens vendor relationships

Your vendors rely on timely payments, and your organized AP process is what delivers on that promise. When your system is reliable, it's easy to pay invoices on schedule and quickly address questions if something doesn’t look right. 

Consistent payment practices support stronger vendor relationship management and can lead to favorable outcomes, like better contract terms.

Creates reliable historical records

Every invoice and payment becomes a permanent part of your business’s financial history. Keeping accurate AP records gives you a clear audit trail to reference when reviewing:

•  Past spending
• Resolving discrepancies
• Responding to tax requests 

Having this information organized in one place makes it easier to respond confidently when questions come up.

Challenges in the accounts payable process

Managing accounts payable can come with a few common challenges, especially when much of the work is handled manually or spread across different systems.

If you want to streamline your accounts payable process, here are some things you can try: 

1. Creating monthly reports: Run reports monthly or weekly to identify trends, improve your AP process, and avoid late payments
2. Setting up reminders: Create reminders for invoice payment deadlines or weekly status checks on your accounts payable. 
3. Moving to electronic payments: Try making only electronic payments when possible to make the process faster and less manual. 
4. Making early payments: Consider making early payments whenever possible and explore possible discounts with vendors. 
5. Using accounting software: Keeping everything in one place with accounting software can automate the process by integrating invoices and payments. 

With tools like QuickBooks Bill Pay, you can manage invoices, approvals, and payments in one place instead of juggling multiple systems.

What’s changed in the accounts payable process?

The accounts payable process has gone through significant transformation in recent years, especially with technological advancements and the increased emphasis on financial transparency and efficiency. 

Here are some key changes in the accounts payable process that small businesses should be aware of:

• Automation and software integration: Technologies now automate invoice processing, vendor payments, and reconciliations, reducing errors and saving time.
• Digital and remote operations: The shift to electronic invoicing and payments has streamlined processes, allowing businesses to manage accounts payable remotely and securely.
• Enhanced security measures: As cybersecurity concerns grow, businesses are adopting robust security protocols like two-factor authentication and encryption, with software solutions providing built-in safeguards.
• Regulatory compliance: Updated accounts payable systems help businesses stay in line with evolving financial regulations by maintaining transparent and accurate records.
• Analytics and reporting: Advanced tools offer insights into spending patterns and vendor performance, aiding strategic financial planning.

Keeping up with these changes can make it easier to run accounts payable more efficiently and stay aligned with current requirements.

Choose the best payment setup for your business

Many things contribute to your small business’s success, but effectively managing cash flow is critical. Adding in the accounts payable process is necessary for effective business accounting, but we know it can be time-consuming. 

With QuickBooks Payments, Bill Pay lets you manage vendor payments within your accounts payable process. 

Spend less time on admin work and more time running your business with QuickBooks accounting software.

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