Accounts Payable

Accounts Payable (AP) is the total amount a business owes to its suppliers, vendors, and service providers for purchases made on credit — that is, goods or services that have been received but not yet paid for. It is recorded as a current liability on the company's balance sheet, since the payment is typically due within a short period (usually 30 to 90 days).

Managing accounts payable efficiently is essential for maintaining good supplier relationships, avoiding late payment fees, and keeping cash flow healthy.

Accounts Payable vs. Accounts Receivable

These two terms are often confused but represent opposite sides of the same transaction:

How Accounts Payable Works

When a business receives a tax invoice or bill of supply from a supplier for goods or services delivered on credit, the amount is recorded as accounts payable. The business then has until the due date specified in the payment terms to settle the amount.

Once payment is made, the accounts payable entry is cleared from the books.

The Accounts Payable Process

A typical AP workflow involves the following steps:

1. Purchase Order (PO): The business raises a purchase order to the supplier outlining the goods or services required, quantity, and agreed price.

2. Goods or Services Receipt: The supplier delivers the goods or completes the service.

3. Invoice Receipt: The supplier issues a tax invoice to the business. This creates the accounts payable entry.

4. Invoice Verification: The business verifies the invoice against the PO and delivery receipt (three-way match).

5. Payment Approval and Processing: Approved invoices are queued for payment on or before the due date.

6. Payment and Reconciliation: Payment is made and the AP entry is closed in the books.

GST and Accounts Payable

In a GST environment, accounts payable has an additional layer — the Input Tax Credit (ITC) dimension. When a business receives a tax invoice from a GST-registered supplier, it can claim ITC on the GST component of the invoice, provided:

• The supplier has filed their GSTR-1 and the invoice appears in the buyer's GSTR-2B
• The goods or services are used for business purposes
• Payment is made to the supplier within 180 days of the invoice date

If payment is not made to the supplier within 180 days, the ITC already claimed must be reversed and added back to the tax liability. This is a critical rule that directly ties accounts payable management to GST compliance.

TDS on Accounts Payable

Certain payments within accounts payable attract TDS under the Income Tax Act. For example, professional fees above ₹30,000 (Section 194J), rent above ₹2.4 lakh per year (Section 194I), and contractor payments above ₹30,000 (Section 194C) require the paying business to deduct TDS before releasing payment to the supplier.

Key Metrics in Accounts Payable

Days Payable Outstanding (DPO) measures how long a business takes on average to pay its suppliers:

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

A higher DPO means the business is holding cash longer, which improves short-term liquidity but may strain supplier relationships if stretched too far.

Best Practices for Managing Accounts Payable

Businesses should centralise all incoming invoices to avoid missed payments, verify invoices promptly using a three-way match process, set up payment reminders aligned with supplier payment terms such as Net 30, and reconcile AP records with GSTR-2B monthly to ensure ITC claims are accurate.

Use JetInvoice's free GST Invoice Generator to create and send professional invoices to your buyers — making it easier for their AP teams to process and pay you on time.