Accounts Payable, Explained: How the Process Works and What It Means for Your Business (2026)

Accounts payable is money your business owes to suppliers for goods or services you’ve already received. You haven’t paid for it yet, though. It sits on your balance sheet as a liability, then clears once you pay the bill.

Get it right and your business pays on time, keeps good supplier relationships, and claims every GST credit it’s entitled to. Get it wrong, though, and you risk late fees, damaged supplier trust, or missed tax deductions.

Quick Answer

Accounts payable (AP) is unpaid supplier invoices, tracked as a current liability. A solid AP process means matching invoices against purchase orders before paying, tracking Days Payable Outstanding (DPO), and claiming GST credits within the ATO’s time limits.

Accounts Payable vs. Accounts Receivable

It’s easy to mix these two up, so here’s the short version:

• Accounts payable is money you owe to suppliers.
• Accounts receivable is money owed to you by customers.

One is a liability, the other an asset. A business tracks both at once. Still, the gap between how fast you pay and how fast you collect shapes your cash flow more than almost anything else.

How the Accounts Payable Process Works

The process looks the same whether you’re a sole trader or a large firm, just with more approval layers as the business grows:

1. Onboard the vendor. Confirm their ABN, bank details, and payment terms upfront.
2. Raise a purchase order. This confirms what you ordered before delivery happens.
3. Receive the goods or service. Someone confirms what actually arrived, then logs it.
4. Receive and record the invoice. You enter the supplier’s bill into your books as a payable.
5. Match and verify. You check the invoice against the purchase order and the goods received.
6. Approve and pay. Once verified, the invoice then moves to payment, on schedule.

Most payment errors happen at step 5, so it’s worth slowing down there. That’s when nobody actually compares the three documents before approving payment.

What a Three-Way Match Actually Checks

A three-way match compares the purchase order, the goods-receipt record, and the supplier’s invoice. If the quantities, prices, and items line up across all three, you approve the invoice. If they don’t, you flag it instead.

This single check catches most billing errors: an invoice for goods you never received, a price that doesn’t match the quote, or a quantity mismatch. Skipping it is how businesses end up paying for things they never got.

Days Payable Outstanding: Measuring How Long You Take to Pay

Days Payable Outstanding (DPO) measures the average number of days a business takes to pay its suppliers. The formula:

DPO = (Accounts Payable ÷ Cost of Goods Sold) × Number of Days

A higher DPO means you’re holding onto cash longer before paying, which helps cash flow. Push it too far, though, and suppliers start tightening your terms or charging more up front. Most businesses aim to pay close to the agreed terms — not early, not late — since that’s what keeps DPO predictable and supplier relationships intact.

Claiming GST Credits on Your Purchases

If your business is GST-registered, you can generally claim a credit for the GST included in what you paid a supplier, provided the purchase was for a business purpose. To claim it, you need a valid tax invoice for purchases over $82.50.

There’s a time limit worth knowing: GST credits generally need to be claimed within four years of the due date of the earliest activity statement they could have been claimed on. Miss that window and the credit is usually gone for good, so reconciling accounts payable regularly isn’t just good practice — it protects money you’re already entitled to.

How Long to Keep Accounts Payable Records in Australia

The ATO generally requires businesses to keep records — invoices, receipts, payment confirmations — for five years. That clock typically starts from when the transaction occurred or the relevant return was lodged, whichever the ATO’s specific rule for that record type points to.

Digital records are fine, as long as they’re a true and clear copy of the original and can be produced if the ATO asks. Losing paper receipts, then, isn’t an excuse once you’ve gone digital.

Common Accounts Payable Mistakes

A handful of mistakes account for most AP headaches:

• Paying without matching. Approving invoices without checking them against the purchase order invites overpayment and fraud.
• No approval workflow. One person with sole control over both approving and paying invoices is a control gap, not a shortcut.
• Missing early-payment discounts. Suppliers who offer 2/10 net 30 terms (2% off if paid within 10 days) are effectively handing back cash for speed.
• Poor record retention. Losing invoices means losing GST credits and failing an ATO review.
• Duplicate payments. Paying the same invoice twice happens more often than businesses expect, especially without a matching system.

Tools That Help Manage Accounts Payable

Most small business accounting software can automate the parts of this process people get wrong manually: matching invoices to purchase orders, flagging duplicate invoice numbers, and scheduling payments against due dates instead of relying on memory. Still, software only helps if someone reviews what it flags — an unmatched invoice sitting in a queue doesn’t fix itself.

For related reading, see our guides to Accounts Receivable, Explained: How It Works and What It Means for Your Cash Flow (2026) and What Is Gearing Ratio? How to Calculate It and What It Means for Your Business (2026).

FAQ

Is accounts payable an asset or a liability?
A liability. It represents money your business owes and expects to pay out soon.

What is a three-way match?
A check comparing the purchase order, the goods-receipt record, and the supplier invoice before you approve payment.

How long should I keep accounts payable records in Australia?
Generally five years, per ATO record-keeping requirements. Digital copies are acceptable if they’re clear and complete.

What’s the time limit for claiming GST credits?
Generally four years from the due date of the earliest activity statement the credit could have been claimed on.

What is Days Payable Outstanding?
A measure of how long, on average, a business takes to pay its suppliers. It’s calculated as accounts payable divided by cost of goods sold, then multiplied by the number of days in the period.

Do I need a tax invoice to claim a GST credit?
For purchases over $82.50, yes. Without a valid tax invoice, you generally can’t claim the credit.

What’s the difference between accounts payable and accrued expenses?
Accounts payable is tied to a supplier invoice you’ve received. Accrued expenses are costs incurred but not yet billed — the invoice simply hasn’t arrived yet.

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