Accounts payable process: Confirm the business requirement, approve the purchase, receive the goods or services, validate and match the vendor invoice, record GST and TDS correctly, obtain payment approval, pay the supplier, and reconcile the vendor account. This guide explains the complete AP cycle with practical controls and journal entries.
Accounts Payable (AP) is more than simply paying supplier invoices. A good AP process ensures that the company pays the right vendor, the right amount, for goods or services actually received, after the required approvals and compliance checks.
For an accounts professional, understanding the complete AP cycle is important because the process connects purchasing, stores, operations, finance, taxation and treasury.
In this guide, we will follow a practical purchase from the initial requirement through invoice booking and finally to vendor payment.
What Is Accounts Payable?
Accounts Payable represents amounts that a business owes to suppliers for goods or services purchased on credit.
For example, suppose a company purchases office equipment worth ₹1,00,000 plus applicable GST from a supplier and receives 30 days’ credit.
The company receives the equipment today but does not pay immediately. Until payment is made, the amount payable to the supplier is recorded as a liability under Accounts Payable.
A typical AP cycle can be represented as:
Purchase Requisition → Purchase Order → Goods/Service Receipt → Vendor Invoice → Verification → Approval → Accounting → Payment → Reconciliation
Let’s understand each stage.
1. Purchase Requisition (PR)
The process normally starts when a department identifies a requirement.
For example, the IT department may require 10 new monitors. Instead of directly purchasing them, the department raises a Purchase Requisition.
A PR normally contains information such as:
- Item or service required
- Quantity
- Specifications
- Required delivery date
- Department or cost centre
- Estimated value
- Business justification
The requisition is then approved according to the company’s approval matrix.
A Purchase Requisition is generally an internal request. It is not the supplier’s invoice and normally does not create an accounting liability by itself.
2. Purchase Order (PO)
After the requisition is approved and the supplier is selected, the purchasing team issues a Purchase Order.
Suppose the company orders:
| Particular | Details |
|---|---|
| Product | Computer Monitor |
| Quantity | 10 |
| Rate per unit | ₹10,000 |
| Basic value | ₹1,00,000 |
| Payment terms | 30 days |
The PO may also specify applicable taxes, delivery location, payment terms, warranties and other commercial conditions.
From an AP perspective, the PO becomes an important control document because the supplier’s invoice can later be compared against what the company actually ordered.
3. Goods Receipt Note (GRN) or Service Confirmation
Issuing a PO does not mean the goods have been received.
When materials arrive, the receiving/store department should verify the actual quantity and condition.
Suppose the PO was for 10 monitors, but only 9 monitors were delivered.
The receipt should reflect 9 units, not 10.
For goods, companies commonly use a Goods Receipt Note (GRN) or equivalent ERP receipt document.
For services, an organisation may use a Service Entry Sheet (SES), completion certificate, timesheet or another approved evidence that the service was performed.
This step becomes very important during invoice matching.
4. Vendor Invoice Receipt and Verification
The supplier sends the invoice after supplying goods or services.
Before posting it, the AP team should check basic information such as the supplier name, invoice number/date, PO reference where applicable, description, quantity/value, tax details and payment terms.
For GST invoices, applicable invoice particulars are prescribed under GST rules, including details such as supplier/recipient GSTIN where applicable, invoice number/date, description, value and tax information.
AP should therefore avoid treating invoice processing as simple data entry.
The question is not merely:
“Have we received an invoice?”
The better question is:
“Is this invoice valid, supported, correctly approved and ready for accounting?”
5. Two-Way and Three-Way Matching
Matching is one of the most important AP controls.
In a typical three-way match, AP compares:
Purchase Order — What did we order?
Goods Receipt — What did we actually receive?
Supplier Invoice — What is the supplier charging us?
Consider our monitor example.
The PO says:
10 monitors × ₹10,000 = ₹1,00,000
But the GRN confirms only:
9 monitors × ₹10,000 = ₹90,000
If the supplier invoices ₹1,00,000 for all 10 monitors, there is a quantity mismatch.
AP should investigate the difference rather than automatically paying the invoice.
Possible reasons include the remaining monitor being in transit, incorrect invoice quantity, incomplete receipt posting or an actual short supply.
This is why three-way matching is a control—not merely an ERP step.
For certain service or non-PO invoices, the company’s process may instead rely on invoice approval, contract/work-order validation or other supporting documentation.
6. Invoice Approval
After verification, the invoice should follow the company’s approval process.
For example, a department head may approve a routine operating expense while a higher-value purchase may require additional approval from finance or senior management.
The approval limits are commonly defined through a Delegation of Authority (DOA) or approval matrix.
Good AP control also means that one person should not ideally control every stage of purchasing, invoice approval and payment.
This separation reduces the risk of errors, duplicate payments and unauthorised transactions.
7. Accounting the Vendor Invoice
Once the invoice is verified and approved, it can be posted in the accounting system.
For a simple expense invoice without considering taxes, the entry may be:
Expense A/c — Dr.
To Vendor A/c — Cr.
But an Indian GST transaction may require separate accounting for eligible input tax.
Example
Assume an eligible business expense is:
Basic value: ₹1,00,000
CGST: ₹9,000
SGST: ₹9,000
Invoice total: ₹1,18,000
A simplified accounting entry could be:
Expense A/c Dr. ₹1,00,000
Input CGST A/c Dr. ₹9,000
Input SGST A/c Dr. ₹9,000
To Vendor A/c ₹1,18,000
However, input tax credit should not be assumed merely because GST appears on an invoice. Eligibility, documentary conditions, blocked-credit rules and the business purpose of the expense must be checked.
GST rules prescribe documentary requirements for claiming ITC, and relevant invoice information is also connected with FORM GSTR-2B requirements.
This is why AP and tax teams often need to work together.
8. TDS Check Before Payment/Accounting
Depending on the nature of the payment and applicable tax provisions, the transaction may also require TDS consideration.
For example, professional services, rent, commission and certain other payments may fall within withholding provisions when applicable conditions are met.
For transactions from 1 April 2026 onward, businesses should refer to the applicable provisions under the Income Tax Act, 2025 rather than automatically relying on old section references from the Income-tax Act, 1961. The Income Tax Department explains that the TDS framework continues under the new Act, with provisions reorganised.
Therefore, AP should verify the nature of payment, applicable threshold/rate, vendor details and current tax provisions before final processing.
9. Payment Proposal and Payment Processing
After posting, an invoice normally remains outstanding in the vendor account until its due date.
Suppose the invoice date is 5 September and payment terms are 30 days.
The AP or treasury team should schedule the payment according to the agreed terms rather than paying every invoice immediately.
Before payment, typical controls may include checking:
- Invoice approval status
- Due date
- Duplicate invoice/payment risk
- Vendor bank details
- Debit/credit notes
- Payment blocks
- Tax deductions
- Available cash/funding
- Authorised payment approval
Depending on company policy, payment may be made through approved banking channels such as NEFT, RTGS or other electronic methods.
10. Accounting Entry at Payment
Ignoring withholding adjustments for a simple example, when the vendor is paid:
Vendor A/c — Dr. ₹1,18,000
To Bank A/c — Cr. ₹1,18,000
The vendor liability is thereby cleared against the bank payment.
Where TDS, deductions, advances, credit notes or other adjustments apply, the actual entry will be different.
11. Vendor Reconciliation
Processing payments does not finish the AP responsibility.
Vendor ledger balances should periodically be reconciled with supplier statements.
For example:
Company books show: ₹2,45,000 payable
Vendor statement shows: ₹2,75,000 payable
Difference: ₹30,000
The AP team needs to identify why.
Possible reasons include an invoice not recorded, payment not adjusted by the vendor, credit note missing from one set of records, duplicate posting, debit note dispute or timing differences.
Unreconciled vendor balances can create problems during month-end and audit.
12. AP Activities at Month-End
Accounts Payable plays an important role in the month-end close.
Typical activities include reviewing unposted invoices, checking GR/IR or receipt/invoice differences, identifying expenses incurred but not yet invoiced, vendor reconciliation, AP ageing review, debit balances in vendor accounts, advance adjustments, GST/ITC checks and TDS compliance.
The objective is not simply to close the AP module.
The objective is to ensure that liabilities and expenses are recorded in the correct accounting period and are supported by appropriate documentation.
AP Ageing Report
An AP ageing report groups outstanding vendor balances according to how long they have remained unpaid.
For example:
| Ageing | Amount |
|---|---|
| Not Due | ₹5,00,000 |
| 1–30 Days | ₹2,00,000 |
| 31–60 Days | ₹75,000 |
| 61–90 Days | ₹30,000 |
| Above 90 Days | ₹20,000 |
The report helps finance teams identify overdue suppliers, old disputed invoices, cash-flow requirements and unusual outstanding balances.
Common Accounts Payable Mistakes
Several AP problems occur not because accounting software is incorrect, but because the underlying process is weak.
Common examples include paying the same invoice twice, processing an invoice without proper approval, failing to investigate PO/GRN/invoice differences, using incorrect vendor bank details, missing credit notes, incorrect GST treatment, missing applicable TDS, paying before agreed due dates without reason and leaving old vendor balances unreconciled.
Strong controls at the beginning of the process reduce the amount of correction required at month-end.
AP Process in SAP/ERP
The exact transaction screens differ between ERP systems and company configurations, but the business logic remains broadly similar.
The system needs to connect the supplier, purchasing document where applicable, goods/service receipt, invoice, accounting entry and eventual payment.
An AP professional should therefore understand why a transaction is being posted, not simply memorise an ERP transaction code.
Software can automate matching and workflows, but accounting judgement and exception handling are still important.
Accounts Payable Process — Quick Summary
Requirement → PR → Approval → PO → Goods/Service Receipt → Invoice → Matching → Approval → Accounting → Tax Checks → Payment → Vendor Reconciliation → Month-End Review
