Guides
Part of Accounts payable: a six-stage pipeline from arrival to reconciliation
How accounts payable questions get answered without guesswork
Accounts payable questions answered honestly: how to know the balance is complete, whether an early payment discount pays, and why supplier statements never match.
Most questions about payables are really one question wearing different clothes: how do I know that what I am about to pay is right. The answers below take that seriously, and where the honest answer is that no page can tell you, the page says so.
These are the questions that come up when somebody takes over a set of books and looks properly at what the business owes. Every figure used is invented to show a calculation, not to suggest a norm.
What to take away
- The payables balance is only as good as the invoices that reached the ledger. Its accuracy depends on something outside the ledger, which is why supplier statements matter.
- Paying early, paying on time and paying late are three different decisions with three different costs, and most businesses make them by accident.
- Nobody can tell you from a page how long you should take to pay. That is set by what you agreed, what your cash allows, and what the relationship will bear.
How do I know the payables figure is complete?
You cannot know it from the ledger, because a missing invoice leaves no trace there. Completeness is established from outside.
Three sources. Supplier statements, which show what each supplier believes you owe. The queue of invoices captured but not yet entered, which is a count of known incompleteness. And whoever ordered things, who knows what has arrived and not been billed.
The practical routine at each month end is to count and value everything sitting unentered, reconcile statements from the largest suppliers, and ask about anything delivered and not yet invoiced. That last one is the accrual, and it is the item most often missed.
Should we pay early to take a discount?
Only if the arithmetic works, and it is worth doing the arithmetic rather than assuming.
An invented example. A supplier offers 2% off for paying 20 days early. On a 5,000 invoice, that is 100 for parting with 4,900 twenty days sooner.
Whether it pays depends on what else the money would have done in those twenty days, and on whether your cash position makes early payment comfortable rather than tight.
The mistake is not taking or refusing discounts. It is having a payment run set to pay on entry, which takes no discount and pays early on everything, permanently, because somebody chose a setting once. The decision belongs in a written policy, as the accounts payable overview describes.
What happens if we pay late?
Commercially, three things in sequence: reminders, then supply on hold, then terms withdrawn. The order varies but the direction does not, and the last of those is the expensive one, because a supplier who moves you to payment in advance changes your working capital overnight.
There may also be a legal position on late payment, including supplier entitlements neither side has discussed. In the United States a private contract is governed by the terms you signed and by state law: your state's enactment of the Uniform Commercial Code covers sales of goods, and many states also have a prompt payment statute that applies to public contracts. Federal contracts are covered by the federal Prompt Payment Act. Your state legislature's statutes site is where to confirm which one applies to you.
One worked example of a written regime: the federal Prompt Payment Act. It requires agencies to pay their own suppliers within 30 days of a proper invoice, and interest penalties follow when they do not.
Why does our supplier's balance never match ours?
Because two ledgers recording the same relationship diverge in four ways, and each has a different fix.
- Timing.The supplier posts an invoice or a credit note you have not received yet, or you pay and the supplier has not allocated the money. The fix is an accrual at month end for goods received and not invoiced, plus a remittance advice sent with every payment.
- Something you have not recorded.A return, a credit note, a rebate or a disputed invoice sitting unanswered. The fix is posting credit notes and returns when they happen and keeping disputes on a list rather than in an inbox.
- A payment or credit in the wrong place.Money posted to the wrong supplier account, an unallocated payment sitting on account, or an invoice entered twice. The fix is the item-by-item reconciliation, not a look at the totals.
- A genuine error on one side.A price or quantity difference, a duplicate reference, a missing page. The fix is a query to the supplier with the documents attached, and a correction in whichever ledger is wrong.
Why supplier balances never match
Difference
- On their statement, not yours
- Invoice never received or entered
- In your ledger, not theirs
- Duplicate or wrong entity
- Payment made, not shown
- Timing or unapplied payment
- Credit issued, not recorded
- Document went to somebody else
What it means
- On their statement, not yours
- Enter it, dated when goods arrived
- In your ledger, not theirs
- Investigate before removing anything
- Payment made, not shown
- Send remittance and date
- Credit issued, not recorded
- Record it and apply to invoice
Fix
- On their statement, not yours
- In your ledger, not theirs
- Payment made, not shown
- Credit issued, not recorded
A net difference near zero is not reassuring. Two errors in opposite directions produce exactly that, which is why the reconciliation is done item by item rather than on the totals.
Do we need a purchase order system?
You need somebody other than the payer confirming that the thing arrived. A purchase order is one way to get that and it is not the only one.
For a business ordering a few things a week from known suppliers, an email from whoever ordered it, saved against the invoice, does the same job. Purchase orders earn their overhead when several people can commit the business to spending, because then the question is not only whether something arrived but whether anyone agreed to it beforehand. If you go that route, the approval step can sit in software you already run, such as the purchase order function in QuickBooks or Xero, or an approval queue in a bill payment service, rather than on paper.
How should recurring charges be handled?
As the category most likely to leak, because nothing about them prompts a decision. Each one was agreed once and renews silently.
Two habits. Fetch the invoice for every recurring charge each month, not the bank line. The document makes the entry defensible: the IRS recordkeeping rules in Publication 583, Starting a Business and Keeping Records, expect records that support each entry, and a bank line on its own shows neither what was bought nor why.
Having the invoice also lets the coding follow the chart of accounts definitions. Those definitions do real work at the boundaries: a monthly subscription is an expense, while an annual license paid up front is a prepaid asset released over the year, and a charge covering both a product and a service may need splitting. Review the whole list once a year, asking of each whether anyone would notice it stopping.
What can nobody tell me from a page?
- How long you should take to pay. That depends on your terms, your cash and your relationships.
- Whether a particular supplier will withdraw terms. Ask them, because the supplier is the only source for that.
- Whether a discount is worth taking without knowing what else your cash is doing.
- What your obligations are on late payment where you tradefor private contracts, the terms you signed and your state's version of the Uniform Commercial Code; for federal contracts, the Prompt Payment Act.
