Accounts Payable Process Explained
From Invoice to Payment
I’ve seen firsthand how a chaotic accounts payable process can turn a finance department into a bottleneck. Picture this: invoices piling up in inboxes, vendors calling about late payments, and your team drowning in spreadsheets trying to figure out what’s actually owed versus what’s already been paid.
When a company buys goods or services, it rarely pays on the spot. Instead, there’s a system ideally a well-oiled one that tracks what the company owes and ensures payments happen correctly and on time. That’s the accounts payable process.
In this guide, I’ll walk you through what accounts payable really means, why getting it right matters more than most people think, and how modern AP automation is fundamentally changing the game. Whether you’re new to finance or looking to streamline your current process, you’ll find practical insights and real-world tips here.
When a company buys goods or services, it rarely pays on the spot. Instead, there’s a system ideally a well-oiled one that tracks what the company owes and ensures payments happen correctly and on time. That’s the accounts payable process.
In this guide, I’ll walk you through what accounts payable really means, why getting it right matters more than most people think, and how modern AP automation is fundamentally changing the game. Whether you’re new to finance or looking to streamline your current process, you’ll find practical insights and real-world tips here.
What is the Accounts Payable Process?
Accounts Payable (AP) represents the money a company owes to its suppliers or vendors for goods or services it has received but hasn’t yet paid for. Think of it as your company’s short-term IOUs.
The accounts payable process is the complete workflow that manages these obligations from start to finish:
The accounts payable process is the complete workflow that manages these obligations from start to finish:
- Receiving invoices from suppliers
- Verifying those invoices against what was actually ordered and received
- Approving them for payment
- Making the payment
- Recording everything properly in the accounting system
Sounds straightforward, right? In practice, it’s where things often go sideways.
Why You Can’t Wing It
Without a structured process, I’ve seen companies face:
- Missed payments leading to strained vendor relationships (and sometimes halted supplies)
- Duplicate payments where the same invoice gets paid twice because nobody checked
- Disputed invoices that sit unresolved for months
- Inaccurate financial statements that give leadership a distorted view of cash obligations
A solid AP process isn’t just about paying bills, it’s about maintaining financial control and operational trust.
Why the Accounts Payable Process Actually Matters
Cash Flow Management: Paying bills on day 5 when you have net 30 terms isn’t responsible it’s wasteful. That’s 25 days of cash you could’ve used strategically. A solid AP process gives you visibility and control over payment timing.
Supplier Relationships: I worked with a company whose disorganized AP led to late payments. Within six months, their best suppliers demanded upfront payment and refused rush orders. Paying on time isn’t just nice; it’s how you build partnerships that give you favors when you need them.
Control & Accuracy: Invoice fraud, fake invoices, duplicates, inflated amounts happens more than people think. The three-way match isn’t bureaucratic red tape; it’s your defense against both honest mistakes and intentional fraud.
Financial Reporting & Compliance: If your AP balance is wrong, your financial statements are wrong. That ripples through loan applications, investor relations, and tax filings.
Operational Efficiency: Manual AP work data entry, chasing approvals, reconciling is soul-crushing and low-value. Automating it frees your team for real analysis and strategy.
Supplier Relationships: I worked with a company whose disorganized AP led to late payments. Within six months, their best suppliers demanded upfront payment and refused rush orders. Paying on time isn’t just nice; it’s how you build partnerships that give you favors when you need them.
Control & Accuracy: Invoice fraud, fake invoices, duplicates, inflated amounts happens more than people think. The three-way match isn’t bureaucratic red tape; it’s your defense against both honest mistakes and intentional fraud.
Financial Reporting & Compliance: If your AP balance is wrong, your financial statements are wrong. That ripples through loan applications, investor relations, and tax filings.
Operational Efficiency: Manual AP work data entry, chasing approvals, reconciling is soul-crushing and low-value. Automating it frees your team for real analysis and strategy.
The Accounts Payable Process: Step by Step
Here’s how a mature AP process actually works, with the nuances you need to understand:
1
Purchase Request & Authorization
Someone in your company identifies a need of office supplies, raw materials, consulting services and submits a purchase request. This is where budget control begins. In well-run organizations, requests are checked against budgets before orders are placed. I’ve seen too many companies skip this step and end up with surprise expenses that blow their quarterly forecasts.
Most companies implement spending thresholds here. Purchases under ₹5,000 might be auto-approved, while anything above needs manager sign-off. This balances speed with control, so you’re not creating bottlenecks for small purchases while still maintaining oversight on significant spending.
Most companies implement spending thresholds here. Purchases under ₹5,000 might be auto-approved, while anything above needs manager sign-off. This balances speed with control, so you’re not creating bottlenecks for small purchases while still maintaining oversight on significant spending.
2
Purchase Order (PO) Creation
Once approved, a formal purchase order is generated and sent to the supplier. The PO is your contract it specifies exactly what you’re buying, how much you’re paying, delivery timelines, and payment terms. This document becomes absolutely critical later for verification.
Here’s my recommendation: Always use POs for recurring or high-value purchases. I know it feels like extra paperwork for a ₹2,000 order, but when a dispute arises six months later, you’ll be glad you have that paper trail. Many companies operate PO-less processes for low-value, high-frequency purchases (like office snacks or taxi reimbursements), and that’s fine—just set clear policies about what qualifies.
Here’s my recommendation: Always use POs for recurring or high-value purchases. I know it feels like extra paperwork for a ₹2,000 order, but when a dispute arises six months later, you’ll be glad you have that paper trail. Many companies operate PO-less processes for low-value, high-frequency purchases (like office snacks or taxi reimbursements), and that’s fine—just set clear policies about what qualifies.
3
Goods/Services Receipt
The supplier delivers the goods or completes the service. Someone on your team usually in receiving or operations confirms that everything arrived as expected. This creates your “receiving report” or “goods receipt note” (GRN), which is proof that you actually got what you ordered.
The problem I see constantly? This step gets rushed or skipped entirely. Someone signs for a delivery without checking quantities or quality. Then, weeks later, when AP is processing the invoice, they discover shortages or damage but the delivery person is long gone, and the supplier claims everything was delivered as agreed. You’re now in dispute mode, which burns far more time than the three minutes it would’ve taken to count the boxes at delivery.
The problem I see constantly? This step gets rushed or skipped entirely. Someone signs for a delivery without checking quantities or quality. Then, weeks later, when AP is processing the invoice, they discover shortages or damage but the delivery person is long gone, and the supplier claims everything was delivered as agreed. You’re now in dispute mode, which burns far more time than the three minutes it would’ve taken to count the boxes at delivery.
4
Invoice Receipt
The supplier sends an invoice—by email, through a portal, or (less commonly now) by mail. Invoices arrive in all formats and conditions. Some are clear and detailed; others are vague or contain errors.
One simple thing that makes life exponentially easier: encourage suppliers to include your PO number on their invoices. Some companies even require it as part of their vendor onboarding process. It sounds like a small detail, but it transforms the matching process from a scavenger hunt into a straightforward lookup.
One simple thing that makes life exponentially easier: encourage suppliers to include your PO number on their invoices. Some companies even require it as part of their vendor onboarding process. It sounds like a small detail, but it transforms the matching process from a scavenger hunt into a straightforward lookup.
5
The Three-Way Match
This is your checkpoint, and it’s non-negotiable. Your AP team compares three documents:
- Purchase Order (PO) – What you ordered
- Goods Receipt Note (GRN) – What you actually received
- Invoice – What the supplier is billing you for
They verify that quantities match, prices match, terms match, and the math adds up. If everything aligns, the invoice is approved for payment. If not, it gets flagged as an exception.
Here’s the thing, perfect matches are rarer than you’d think. In my experience, maybe 60-70% of invoices match perfectly on the first pass. The rest need human investigation, which is why exception handling is so critical.
Common mismatches I’ve encountered:
Here’s the thing, perfect matches are rarer than you’d think. In my experience, maybe 60-70% of invoices match perfectly on the first pass. The rest need human investigation, which is why exception handling is so critical.
Common mismatches I’ve encountered:
- Quantity variance: You ordered 100 units, received 95, but the invoice charges for 100
- Price difference: The PO says ₹50 per unit, but the invoice shows ₹55 (maybe a price increase nobody communicated)
- Duplicate invoice: The supplier sends the same invoice twice, accidentally or deliberately
- Missing PO: The invoice arrives but there’s no corresponding PO in the system because someone bypassed the process
The approach that works: Set tolerance thresholds. If the invoice is within ₹500 or 2% of the PO (whichever is lower), auto-approve it. Flag everything else for review. This prevents bottlenecks over trivial differences (like a ₹20 rounding variance) while maintaining control over material discrepancies.
6
Exception Handling & Approvals
When something doesn’t match, the system flags it and someone investigates usually an AP specialist or the department that made the purchase. This is where invoices get stuck. An exception might languish in someone’s inbox for weeks because they’re busy, don’t have context, or nobody told them they need to act.
Let me give you the common exceptions and what usually happens:
Price mismatch? Contact the supplier. Maybe they gave you a quote but forgot to update their billing system. Or maybe they’re testing to see if you notice (yes, this happens).
Quantity shortfall? If you received less, you should pay less. Work with your receiving team and the supplier to issue a credit note or revised invoice.
No PO? This happens when someone bypassed the approval process. You’ll need to create a retroactive PO (if your system allows) or get manager approval for a “non-PO invoice.”
Track your exception rates. If you’re seeing 40%+ exceptions, something upstream is broken maybe unclear POs, sloppy receiving practices, or unreliable suppliers. Don’t just process exceptions in isolation; analyze patterns and fix root causes.
Let me give you the common exceptions and what usually happens:
Price mismatch? Contact the supplier. Maybe they gave you a quote but forgot to update their billing system. Or maybe they’re testing to see if you notice (yes, this happens).
Quantity shortfall? If you received less, you should pay less. Work with your receiving team and the supplier to issue a credit note or revised invoice.
No PO? This happens when someone bypassed the approval process. You’ll need to create a retroactive PO (if your system allows) or get manager approval for a “non-PO invoice.”
Track your exception rates. If you’re seeing 40%+ exceptions, something upstream is broken maybe unclear POs, sloppy receiving practices, or unreliable suppliers. Don’t just process exceptions in isolation; analyze patterns and fix root causes.
7
Payment Processing
Once approved, payment is scheduled according to the payment terms (net 30, net 45, etc.) and executed usually via bank transfer, though sometimes by check or other methods. Payment timing affects your cash flow and vendor relationships. Pay too early, and you’re giving up working capital. Pay too late, and you’re damaging relationships and maybe incurring late fees.
Most companies batch their payment runs instead of processing payments daily. For example, every Friday, process all invoices due in the next 7 days. This balances efficiency with timely payment and reduces the administrative burden.
One more thing: if a supplier offers early payment discounts (like 2/10 net 30 meaning 2% discount if paid within 10 days), do the math. A 2% discount for paying 20 days early is roughly equivalent to a 36% annual return. That’s almost always worth it.
Most companies batch their payment runs instead of processing payments daily. For example, every Friday, process all invoices due in the next 7 days. This balances efficiency with timely payment and reduces the administrative burden.
One more thing: if a supplier offers early payment discounts (like 2/10 net 30 meaning 2% discount if paid within 10 days), do the math. A 2% discount for paying 20 days early is roughly equivalent to a 36% annual return. That’s almost always worth it.
8
Recording & Reconciliation
Once payment is made, the invoice is marked “paid” in your accounting system. The liability (accounts payable) is cleared, and the transaction flows through to your general ledger. This is where your financial records get updated—the payment reduces both your AP balance and your cash balance.
AP teams typically reconcile their AP sub-ledger with the general ledger to ensure everything is captured correctly. They also review aging reports lists of unpaid invoices grouped by how overdue they are (current, 30 days, 60 days, 90+ days).
Don’t wait until month-end to reconcile, though. Weekly reconciliation catches errors while transactions are still fresh in everyone’s mind, and small discrepancies are easier to trace and fix before they compound.
AP teams typically reconcile their AP sub-ledger with the general ledger to ensure everything is captured correctly. They also review aging reports lists of unpaid invoices grouped by how overdue they are (current, 30 days, 60 days, 90+ days).
Don’t wait until month-end to reconcile, though. Weekly reconciliation catches errors while transactions are still fresh in everyone’s mind, and small discrepancies are easier to trace and fix before they compound.
How AP Automation Is Changing Everything
Manual AP processing is genuinely painful. Someone has to open emails or scan paper invoices, manually type data into the system, hunt down the corresponding PO, match everything by hand, chase people for approvals, schedule payments, and reconcile everything. It’s slow, boring, and error-prone. A single typo can cause payment delays or duplicate payments.
Intelligent Data Capture (OCR + AI)
Modern systems can “read” invoices whether they’re PDFs, images, or even photos taken on a phone. Using optical character recognition (OCR) and machine learning, they extract key data: supplier name, invoice number, date, amounts, line items.
Early OCR was terrible—it required perfectly formatted invoices and still messed up regularly. Today’s AI-powered systems handle messy formats, handwritten notes, and even invoices in multiple languages with 95%+ accuracy. This alone eliminates hours of manual data entry.
Early OCR was terrible—it required perfectly formatted invoices and still messed up regularly. Today’s AI-powered systems handle messy formats, handwritten notes, and even invoices in multiple languages with 95%+ accuracy. This alone eliminates hours of manual data entry.
Automated Matching
The system automatically pulls the corresponding PO and GRN from your ERP and does the three-way match in seconds. If everything aligns within your tolerance thresholds, the invoice is auto-approved.
Instead of an AP clerk spending 10-15 minutes per invoice doing manual matching, the system does it instantly. This is where you see the biggest time savings—routine invoices just flow through without human intervention.
Instead of an AP clerk spending 10-15 minutes per invoice doing manual matching, the system does it instantly. This is where you see the biggest time savings—routine invoices just flow through without human intervention.
Intelligent Workflow Routing
When an invoice needs approval (because it’s high-value, doesn’t have a PO, or has an exception), the system automatically routes it to the right person based on rules you set department, amount thresholds, supplier type, whatever makes sense for your organization.
The difference this makes is huge. Instead of invoices sitting in someone’s email because they forgot or didn’t know they needed to act, the system sends reminders and escalations. Approval times drop from days to hours.
The difference this makes is huge. Instead of invoices sitting in someone’s email because they forgot or didn’t know they needed to act, the system sends reminders and escalations. Approval times drop from days to hours.
Touchless Processing
This is the holy grail: invoices that flow from receipt to payment with zero human intervention. For routine, perfectly matching invoices from trusted suppliers, estimates suggest 70-80% can be fully touchless.
Reality check, though—you’ll probably never hit 100% touchless. Edge cases, high-value invoices, and new suppliers will always need human eyes. But even getting to 60-70% touchless frees up enormous capacity for your team to focus on exceptions and strategic work.
Reality check, though—you’ll probably never hit 100% touchless. Edge cases, high-value invoices, and new suppliers will always need human eyes. But even getting to 60-70% touchless frees up enormous capacity for your team to focus on exceptions and strategic work.
Easy to Integrate with ERP
Automated systems are excellent at spotting patterns humans miss. Duplicate invoice numbers, the same supplier submitting similar amounts multiple times, new bank account details (a common fraud tactic), invoices that don’t match any known supplier or PO—the system flags these automatically.
This protection alone can save companies from costly mistakes or deliberate fraud attempts.
This protection alone can save companies from costly mistakes or deliberate fraud attempts.
Analytics & Visibility
Here’s something people underestimate: automation gives you data. Dashboards show average processing time per invoice, exception rates and common causes, supplier performance, cash flow forecasts based on upcoming payment obligations, and early payment discount opportunities you might be missing.
Once you have this visibility, you can actually manage and improve the process. Without it, you’re flying blind, just reacting to whatever crisis surfaces next.
Once you have this visibility, you can actually manage and improve the process. Without it, you’re flying blind, just reacting to whatever crisis surfaces next.
Final Thoughts
The accounts payable process might not be glamorous, but it’s absolutely foundational. Get it wrong, and you’re juggling late payments, vendor disputes, cash flow surprises, and a demoralized team drowning in paperwork. Done right, AP becomes a competitive advantage not just an expense to minimize, but a function that actually drives better business outcomes. And remember: automation is a tool, not a replacement for good judgment.
If you’re still running a manual AP process, you’re not just working harder than you need to you’re also running higher risks and missing opportunities. Start small if you need to, but start. Automate data capture first. Then matching. Then approvals. Each step makes your life easier.
If you’re still running a manual AP process, you’re not just working harder than you need to you’re also running higher risks and missing opportunities. Start small if you need to, but start. Automate data capture first. Then matching. Then approvals. Each step makes your life easier.
