The accounts payable process is the sequence a business uses to verify, approve, pay, and record every bill it owes to a vendor. At a high level, it runs in a predictable order: gather the supporting documents, match them against each other, enter the invoice, get it approved by someone other than the person who entered it, pay it through the appropriate channel, and record the payment in the general ledger. Layered on top are tax reporting duties, record retention rules, and controls that keep fraud out of the system.
Get the sequence right and cash flow stays predictable, vendors keep shipping, and year-end filings go out clean. Skip steps and the costs show up as duplicate payments, missed discounts, IRS penalties, or fraud losses that are hard to claw back.
The Documents You Need Before Paying Anything
Nothing gets paid until three documents agree: the purchase order, the receiving report, and the vendor’s invoice. The purchase order is the original authorization from procurement and states what was ordered, at what price, in what quantity. The receiving report comes from the warehouse or dock and confirms the goods actually arrived in the right condition and count. The invoice is the vendor’s formal request for payment.
Comparing all three is called a three-way match. When quantities, descriptions, and prices line up, the invoice moves forward. When they don’t, the discrepancy has to be resolved before a check goes out. Most overpayments and billing fraud get caught here, which is why rushing or bypassing the match is where losses start.
Vendor onboarding belongs in this stage too. Before the first invoice is paid, the AP team should collect an IRS Form W-9 with the vendor’s taxpayer identification number and legal name. Without a valid TIN, the company is on the hook for backup withholding of 24% on future payments to that vendor.1Internal Revenue Service. Instructions for the Requester of Form W-9 Under federal regulations implementing 26 U.S.C. ยง 6041, any business that pays $600 or more to a single non-employee during the calendar year must report those payments to the IRS on an information return.2eCFR. 26 CFR 1.6041-1 – Return of Information as to Payments of $600 or More Collecting the W-9 upfront means the data is ready when filing season hits.
Payment terms on the invoice drive scheduling. “Net 30” means the full amount is due in 30 days. “2/10 Net 30” offers a 2% discount for paying within 10 days. For companies with cash on hand, capturing those discounts is one of the cleanest returns available.
Entering and Approving the Invoice
Once the match checks out, a data entry clerk keys the invoice into the accounting system. Line items, tax amounts, and payment terms all get recorded, and the system compares the entered figures against the approved purchase order to flag mismatches automatically.
The invoice then routes to a department head or budget manager for formal approval. The approver must be someone other than the clerk who entered the data. This separation of duties is a core internal control principle. For publicly traded companies, it sits inside the broader requirements of Section 404 of the Sarbanes-Oxley Act, which requires management to assess and report on the effectiveness of internal controls over financial reporting.3U.S. Securities and Exchange Commission. Study of the Sarbanes-Oxley Act of 2002 Section 404 Private companies aren’t bound by the same statute, but the logic is identical: when the person who enters an invoice can’t also authorize its payment, internal theft becomes far harder to execute.
During approval, the system may flag invoices that exceed preset spending limits or come from vendors that haven’t been fully verified. Approvers review digitized copies of the purchase order, receiving report, and invoice before signing off. Marking the invoice “approved for payment” tells the finance team it can schedule the disbursement.
Choosing a Payment Method
The payment method depends on the amount, urgency, vendor preference, and whether the company wants to earn rebates or minimize processing costs.
Checks
Paper checks remain common for smaller vendors and for government agencies that haven’t moved to electronic payment. Many companies require a second signature on checks above a set threshold, often $5,000 or $10,000. That policy is not a legal requirement; it’s an internal control the company adopts to force a final human review before a large sum leaves the account.
Check fraud is persistent. One of the more effective countermeasures is a bank service called Positive Pay. The company uploads a file of issued checks, listing check numbers, amounts, and payee names. When a check is presented, the bank compares it to the file and flags any mismatch as an exception for the company to approve or reject before funds are released. This catches altered checks and forgeries that would otherwise clear.
ACH Transfers
Automated Clearing House transfers move funds electronically between bank accounts and handle the bulk of recurring vendor payments. They cost significantly less per transaction than checks or wires, and most clear within one to three business days, though same-day ACH is available for an added fee.4Consumer Financial Protection Bureau. What Is an ACH Transaction? For established vendors with predictable billing, ACH removes the printing, mailing, and reconciliation overhead of paper checks.
Wire Transfers
Wires are reserved for urgent or international payments where same-day finality matters. Domestic wires at major banks typically cost up to $30, and international wires up to $60. Those fees make wires impractical for routine bills, but when a supplier needs immediate settlement or the transaction crosses borders, they’re often the only option.
Virtual Cards
Virtual credit cards are gaining ground in business-to-business payments. The AP team generates a single-use card number tied to a specific invoice amount, sends it to the vendor, and the vendor processes it like a normal card charge. The number expires after one use, which eliminates reuse fraud. Many virtual card programs also pay a rebate on each transaction. The trade-off: not all vendors accept cards, and some resist absorbing the processing fee.
Recording the Payment in the Ledger
The cycle ends with a journal entry that follows double-entry bookkeeping. When payment goes out, the clerk records a debit to accounts payable, reducing the liability, and a credit to cash, reflecting the outflow. Both sides balance.
That entry creates a permanent audit trail. External auditors trace entries back to source documents during financial statement reviews. Reconciling the bank statement against the ledger each month confirms the book balance matches the actual bank balance, and any discrepancy should be investigated immediately rather than carried forward.
Guarding Against Fraud
Two threats dominate: Business Email Compromise and duplicate invoice schemes.
In a Business Email Compromise attack, a fraudster impersonates a vendor or executive by email and asks for a change to banking details or an urgent payment. The best defense is a firm policy that no bank account change is ever processed on the basis of an email alone. Every change to vendor payment information should be verified by phone using a known contact number, not a number supplied in the suspicious message. Multi-factor authentication on email and financial systems adds another layer, and staff training helps people treat urgency as a red flag rather than a reason to skip verification.
Duplicate payments happen more often than most businesses realize, and they aren’t always fraud. A vendor may send the same invoice twice with different formatting, or a clerk may enter one bill under two reference numbers. Automated matching software flags invoices that share the same vendor, amount, or date. More advanced systems use optical character recognition to build digital fingerprints that detect near-duplicates even when invoice numbers have been altered. The core control is simple: never process an invoice without matching it to a unique purchase order, and configure the system to reject any invoice number already in the database.
Tax Obligations the AP Team Owns
Accounts payable generates the data behind year-end tax filings. Any business that pays $600 or more to a non-employee during the year must report those payments on Form 1099-NEC.5Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC The form must be furnished to the recipient and filed with the IRS by January 31 of the following year, and unlike most other information returns, no automatic extension is available for the 1099-NEC.6Internal Revenue Service. Publication 1099 General Instructions for Certain Information Returns Businesses filing 10 or more information returns of any type must file electronically.7Internal Revenue Service. E-File Information Returns
Missing the deadline triggers escalating penalties per form, and intentional disregard of the filing requirement carries a much higher per-form penalty with no cap.8Internal Revenue Service. Information Return Penalties For a company with hundreds of vendors, those figures add up quickly.
Use tax is the obligation most AP departments miss. When a business buys supplies, software, or equipment from an out-of-state vendor that doesn’t charge sales tax, the business generally owes use tax to its own state at the same rate. AP sees every invoice, so AP is best positioned to catch these. The practical step is to build a review into invoice coding: when an invoice arrives without sales tax charged, flag it for use tax accrual. Failing to do this is one of the most common findings in state sales and use tax audits, and back taxes, penalties, and interest can reach across several years of purchases. Keeping signed, complete exemption certificates on file for tax-exempt purchases matters just as much, since incomplete certificates are frequently rejected during audits.
Keeping Records and Handling Uncashed Checks
The IRS requires businesses to keep records supporting income and deductions for as long as the period of limitations remains open. For most returns, that’s three years from the filing date. Underreporting income by more than 25% extends the window to six years. Fraudulent returns have no limitation period. Employment tax records carry a four-year retention requirement.9Internal Revenue Service. Publication 583, Starting a Business and Keeping Records Most accountants recommend keeping AP documentation for at least seven years to cover the longest realistic audit window, and digital storage makes that easy enough that there’s little reason to purge sooner.
Uncashed checks don’t simply drop off the books. Every state has unclaimed property laws that require businesses to report and eventually turn over dormant obligations. Dormancy periods run three years in most states and five or seven in others. Before transferring the funds, the business generally has to send a notice to the vendor’s last known address giving them a chance to claim the payment. Ignoring these rules can bring penalties and expanded audit periods from state unclaimed property divisions. Running a report of outstanding checks at least annually, and following up with vendors before the dormancy clock runs out, keeps the company in compliance.
What Late Payment Costs You
Late payments carry both direct costs and relationship damage. Many vendor contracts specify late payment interest or fees. Businesses holding federal government contracts face a specific standard: the Prompt Payment Act requires agencies to pay interest on late payments at a rate set by Treasury, currently 4.125% for the first half of 2026.10Bureau of the Fiscal Service, U.S. Department of the Treasury. Interest Rates – Prompt Payment
In the private sector, late payment terms are whatever the contract says. When the contract is silent, state law fills the gap, and statutory interest rates on overdue commercial obligations vary widely. The harder-to-quantify cost is trust. Suppliers who doubt they’ll be paid on time tighten credit terms, raise prices, or prioritize other customers during shortages. Paying on schedule is one of the most tangible ways a company protects its supply chain.