---
title: "Accounts Payable Process: Step by Step for Small Businesses"
description: "The accounts payable process runs from purchase order to receipt, invoice, three way match, approval, payment and reconciliation. Here are all 8 steps."
canonical: https://luckpanda.app/blog/accounts-payable-process
author: "Dhrumil Barot"
author_bio: "Dhrumil is a small-business operations and compliance expert. Dhrumil built LuckPanda so small businesses can run invoicing, inventory, accounts and compliance in one place."
published: 2026-11-03
updated: 2026-11-03
category: "Purchasing and inventory"
keywords: "accounts payable step by step process"
language: en
---

# Accounts Payable Process: Step by Step for Small Businesses

The eight steps of accounts payable, from purchase order to reconciliation, with the India deadlines for MSE suppliers and GST credit.

By [Dhrumil Barot](https://luckpanda.app/about#founder), Founder. Published 3 Nov 2026. Updated 3 Nov 2026. 6 min read.

**TL;DR:** The accounts payable step by step process has eight steps: raise a purchase order, receive the goods, capture the supplier invoice, match it to the PO and receipt, approve it, schedule and make the payment, record it, and reconcile. Each step has one document and one check. In India, three deadlines sit on top of it: 45 days for MSE suppliers, 180 days for GST input tax credit, and the income tax rule that delays the deduction of late MSE dues.

The accounts payable (AP) process is the set of steps a business follows from the moment it commits to buying something until the supplier is paid and the payment is recorded in the books. For a small business, a working AP process is: (1) purchase order, (2) goods received note, (3) invoice capture, (4) two or three way match, (5) approval, (6) payment scheduling against the due date, (7) payment recording, and (8) monthly reconciliation of the vendor ledger and bank. The goal is simple: pay every correct bill once, on time, and never pay a wrong one.

## What do you need before you start?

You need four things in place before the first step works:

- **A vendor master record** for every supplier: legal name, address, bank details, tax ID (GSTIN and PAN in India, a TIN collected on [IRS Form W-9](https://www.irs.gov/forms-pubs/about-form-w-9) in the US), payment terms and whether the supplier is a registered micro or small enterprise (Udyam number).
- **Payment terms** agreed in writing: net 30, net 45, or an early payment term such as "2/10 net 30" (2% off if paid within 10 days, full amount due in 30).
- **An approval rule**: who can approve which amounts. For example, the owner approves anything above ₹50,000, a manager approves below.
- **One place where documents live**: a shared folder, an accounting tool or a purchasing system. Spreadsheets work at 20 bills a month; they break at 200.

## The accounts payable process, step by step

![The eight steps of the accounts payable process from purchase order to reconciliation](https://cdn.sanity.io/images/pcmcvz9y/production/0cd609021052b0db9889ffb8528f9e7170506f8e-1344x326.png?w=1200&auto=format&fit=max)

*Each step produces one document the next step checks.*

### Step 1. Raise a purchase order

A purchase order (PO) is the buyer's written commitment: items, quantity, price, delivery date and payment terms. Give it a unique number (for example PO-2026-0142) and send it to the supplier. Without a PO, the invoice is the first time anyone sees the price, and you have nothing to check it against. For repeat purchases at fixed prices, a [blanket purchase order](https://luckpanda.app/blog/blanket-purchase-order) covers many deliveries with one document.

### Step 2. Record what you received

When the goods arrive, someone who did not place the order counts them and records a goods received note (GRN): PO number, items and quantities received, date, and any damage or shortfall. For services, the equivalent is a sign-off that the work was done. This is the document most small businesses skip, and it is the one that catches short deliveries.

### Step 3. Capture the supplier invoice

Log every invoice the day it arrives: supplier, invoice number, invoice date, amount, tax, due date and the PO number it refers to. Check that it is a valid tax invoice. In India, Rule 46 of the CGST Rules lists the mandatory fields, including the supplier's GSTIN, a unique invoice number, date, HSN or SAC code, taxable value and tax amount. Reject invoices that are missing them, because they will block your input tax credit later.

Duplicate check: before saving, search for the same supplier and invoice number. Suppliers often send the same invoice by email and post, and a second copy is the most common cause of a double payment.

### Step 4. Match the invoice to the PO and the receipt

Matching proves you are paying for what you ordered and what you received.

| Match type | Documents compared | Use it for |
| --- | --- | --- |
| Two way match | PO and invoice | Services, subscriptions, low-value items |
| Three way match | PO, GRN and invoice | Physical goods, stock, anything counted |
| Four way match | PO, GRN, inspection report and invoice | Goods that need a quality check |

![A three way match where the invoice bills 100 units but the goods received note shows 95](https://cdn.sanity.io/images/pcmcvz9y/production/e3fc6ebf81df6f1fd0cc0db047e5bd94eb63ca15-1344x318.png?w=1200&auto=format&fit=max)

*Pay for 95 units (₹11,400) and ask the supplier for a credit note for 5.*

When the documents do not match, stop. Put the invoice on hold, contact the supplier or the person who ordered, and resolve it with a corrected invoice or a credit note. Do not short-pay without paperwork: the supplier's ledger and yours will disagree for months. A small tolerance (for example, price differences under 1% or ₹100) avoids holding invoices over rounding. Track price differences that pass the tolerance anyway; the [purchase price variance guide](https://luckpanda.app/blog/purchase-price-variance) shows how.

### Step 5. Approve the invoice

Route the matched invoice to the person your approval rule names. The approver confirms the spend was authorised and codes it to the right expense or stock account. Keep the person who approves separate from the person who pays: that one split stops most internal fraud. The [invoice approval process guide](https://luckpanda.app/blog/invoice-approval-process) covers approval chains and limits in detail.

### Step 6. Schedule the payment against the due date

Pay on the due date, not when the invoice lands, unless an early payment discount is worth more than holding the cash. A 2/10 net 30 discount is worth about 37% a year, so it is almost always worth taking. In India, schedule MSE suppliers first, because the law sets the deadline, not the invoice (see the next section). Before releasing a payment, confirm the bank details match the vendor master. A changed bank account in an email is the classic payment fraud; verify it by phone using a number you already have.

Deduct tax at source where it applies: in India, TDS on contractor and professional payments and on purchases of goods above the thresholds in the Income-tax law. Pay the net amount to the supplier and the TDS to the government by its due date. The [TDS calculator](https://luckpanda.app/tools/tds-calculator) gives the amount by section.

### Step 7. Record the payment

Mark the invoice paid with the date, amount, method (bank transfer, UPI, cheque) and bank reference. Send the supplier a remittance advice listing the invoices covered, so their team can apply the payment without calling you.

### Step 8. Reconcile and file

Every month, reconcile three things: your vendor ledger against each major supplier's statement, your AP balance against the bank, and (in India) your purchase register against GSTR-2B. Review the AP aging report to catch anything overdue. Then file the PO, GRN, invoice, approval and payment proof together. GST law requires books to be kept for 72 months from the due date of the annual return for the year.

[Accounts Payable Basics: A Guide to Almost Everything](https://www.youtube.com/watch?v=6sFBmLwZlz8&t=138s) (AP Now)

AP Now walks through how an invoice moves through accounts payable: approval by the person who ordered, matching, scheduling payment by the agreed terms, and why discrepancies must be resolved before payment rather than short-paid.

- [2:18](https://www.youtube.com/watch?v=6sFBmLwZlz8&t=138s) What happens when an invoice arrives
- [3:04](https://www.youtube.com/watch?v=6sFBmLwZlz8&t=184s) Scheduling payment by terms and early payment discounts
- [3:27](https://www.youtube.com/watch?v=6sFBmLwZlz8&t=207s) Handling an invoice that does not match
- [4:37](https://www.youtube.com/watch?v=6sFBmLwZlz8&t=277s) Two way versus three way match
- [5:00](https://www.youtube.com/watch?v=6sFBmLwZlz8&t=300s) Why three way matching stops duplicate payments

## Which India-specific deadlines change the AP process?

Most AP guides are written for the US and skip the rules that make Indian payables time-bound. Three matter:

| Rule | What it says | What to do in AP |
| --- | --- | --- |
| MSMED Act 2006, sections 15 and 16 | Pay a micro or small supplier by the agreed date, never more than 45 days after accepting the goods (15 days if nothing was agreed). Late payment carries compound interest with monthly rests at three times the RBI bank rate. | Flag MSE vendors in the vendor master and schedule them inside 45 days |
| Income-tax Act 1961, section 43B(h) (from AY 2024-25) | Amounts owed to MSE suppliers beyond the section 15 limit are deductible only in the year they are actually paid | Clear MSE dues before 31 March to keep the deduction in the year |
| CGST Act, section 16(2), second proviso | Input tax credit claimed on an invoice must be reversed, with interest, if the supplier is not paid the value and tax within 180 days of the invoice date. It can be claimed again once you pay. | Run a monthly list of unpaid invoices older than 150 days |

Sources: the [MSMED Act, 2006 on India Code](https://www.indiacode.nic.in/handle/123456789/2013) and the [CGST Act on the CBIC portal](https://cbic-gst.gov.in/gst-acts.html). This is information, not tax advice; check your situation with your accountant.

> Section 22 of the MSMED Act also requires buyers whose accounts are audited to disclose unpaid MSE dues and interest in their annual accounts, so an AP ledger that tags MSE vendors saves work at year end.

## How do you prevent duplicate or fraudulent vendor payments?

Five controls stop almost all of it:

1. **No PO, no pay** for goods: invoices without a PO go back to the person who bought.
2. **Duplicate check** on supplier plus invoice number before the invoice is saved.
3. **Separate roles**: the person who adds vendors or changes bank details does not approve or release payments.
4. **Bank detail changes verified** by a call to a known number, never by replying to the email that requested it.
5. **Pay only from the matched, approved list**, never from an invoice forwarded in chat.

## How fast should invoices move from receipt to approval?

From invoice receipt to approval should take days, not weeks: aim to capture an invoice the day it arrives and have it matched and approved within about five working days. Payment then waits for the due date. The total cycle is set by your terms (30 or 45 days), and for MSE suppliers in India it cannot exceed 45 days after acceptance. If approval regularly takes longer than a week, the approval rule has too many people in it.

## What are the most common AP mistakes?

- Paying from the invoice alone, with no PO or receipt to check it against.
- Paying early by habit and losing the cash buffer, or late by habit and paying MSE interest.
- Letting invoices sit in someone's inbox, so they are logged after the due date.
- Not reconciling against supplier statements, so missing credit notes go unnoticed.
- Missing the GSTR-2B check, so input tax credit is claimed on invoices the supplier never filed.

## How do you run this in one system?

A spreadsheet can hold the steps, but the matching, due dates and MSE flags are where it slips. LuckPanda's [Purchasing module](https://luckpanda.app/modules/purchasing) keeps vendors, [purchase orders](https://luckpanda.app/modules/purchasing/purchase-orders), bills and vendor payouts on one record, so a bill is checked against its PO and a person approves before anything is paid. Drafting is free; issuing and sending are part of the ₹249 per month module.

## Questions

### Who should handle accounts payable in a small business?

Often the owner and one bookkeeper. Split the work so one person enters bills and vendor details and the other approves and releases payments; with only two people, that single split is the most useful control you have.

### What is the difference between accounts payable and accounts receivable?

Accounts payable is money your business owes suppliers; it is a liability. Accounts receivable is money customers owe you; it is an asset. The AP process pays bills, the AR process collects them.

### Is accounts payable an expense?

No. Accounts payable is a liability on the balance sheet. The expense is recorded when the cost is incurred (or the stock is used), and the payable is cleared when you pay.

### How many days does a buyer have to pay an MSME supplier in India?

Up to the agreed date, never more than 45 days from acceptance of the goods or services, or 15 days if no date was agreed, under section 15 of the MSMED Act, 2006.

### What happens to GST input tax credit if I pay a supplier late?

If you do not pay the supplier the invoice value and tax within 180 days of the invoice date, the credit must be reversed with interest under section 16(2) of the CGST Act. You can claim it again after paying.

## More guides

- [Average Inventory: Formula, Examples and When Each Method Fits](https://luckpanda.app/blog/average-inventory)
- [Inventory Turnover Ratio: Formula, Example and What Is Good](https://luckpanda.app/blog/inventory-turnover-ratio)
- [Reorder Point Formula: How to Calculate It, With Safety Stock](https://luckpanda.app/blog/reorder-point-formula)

## Related tools

- [TDS calculator](https://luckpanda.app/tools/tds-calculator): TDS on contractor, professional, commission and rent payments for 2026-27.

## About the author

**Written by [Dhrumil Barot](https://luckpanda.app/about#founder)**, Founder. Dhrumil is a small-business operations and compliance expert. Dhrumil built LuckPanda so small businesses can run invoicing, inventory, accounts and compliance in one place. [LinkedIn](https://www.linkedin.com/in/bdhrumil) · [X](https://x.com/fyidhrumil)