What Is Accounts Payable?
Accounts Payable

Accounts payable is the mirror of accounts receivable. Where receivables are the invoices you have sent and are waiting to be paid for, payables are the bills you have received and still have to pay. Every business has them, however small: materials, stock, software, subcontractors, utilities. Managing them well keeps suppliers on your side, keeps your records clean and complete, and, if you are VAT registered, protects your VAT reclaims.

The accounts payable process

Checking a supplier bill

Before a bill is paid, check it. Is it from a supplier you actually use, at an address you recognise? Does it match what you ordered and what arrived? Are the prices the agreed prices? Is the arithmetic right? If you are VAT registered and will reclaim VAT, is it a valid VAT invoice with the supplier's VAT number? A few seconds of checking catches duplicate bills, overcharges and, occasionally, fraudulent invoices from businesses you have never dealt with.

Paying on time

Paying suppliers on time is not only good manners. If you are a business customer and pay late, a supplier can claim statutory interest at 8% over the Bank of England base rate and fixed compensation of £40, £70 or £100, under the Late Payment of Commercial Debts (Interest) Act 1998. More practically, suppliers who are paid promptly give better terms, better service and more flexibility when you need it. The invoice due date calculator shows when a bill falls due under its terms.

Payables and VAT

For a VAT-registered business, the VAT on supplier bills is input tax that can usually be reclaimed. Under standard VAT accounting, you can normally reclaim it in the VAT period of the invoice's tax point, even before you pay, as long as you hold a valid VAT invoice. Under the cash accounting scheme, you reclaim it when you pay. Either way, the supplier's VAT invoice is your evidence. Without one, the reclaim may be refused. The VAT calculator helps check the VAT on a bill.

Payables and your tax

Supplier bills are the evidence for your business expenses. Under the cash basis, most sole traders count an expense when they pay it; under accruals, when it is incurred, whether or not it has been paid. Either way, keep the bill: an expense without evidence is hard to defend if HMRC asks. For sole traders, records must be kept for at least 5 years after the 31 January filing deadline, and VAT records generally for 6 years.

Avoiding invoice fraud

Small businesses are common targets for fake invoices and for emails claiming a supplier's bank details have changed. Protect yourself:

• Pay only bills you can match to an order or a regular supply.
• Never change a supplier's bank details on the strength of an email alone; confirm by phone on a number you already hold.
• Be wary of urgent requests to pay, especially from someone new.
• Check the payee name your bank shows before sending a first payment to new details.

Payables and cash flow

Managing payables well does not mean paying as late as possible. It means knowing what is due when, so you can plan. List bills by due date, pay on the due date rather than early unless there is a discount worth having, and talk to a supplier before a bill is late, not after, if cash is tight. Suppliers are usually far more flexible when asked in advance.

Reconciling supplier statements

Many suppliers send a monthly statement of account listing their invoices, credit notes and your payments. Compare it with your own records. A bill on their statement that you do not have may never have reached you; a payment you made that is missing may have been allocated to the wrong account. Sort differences out while they are small, and you will never be surprised by a supplier chasing you for something you thought was paid.

Payment runs

Paying bills one at a time as they arrive is easy to lose track of. Many businesses, even small ones, pay in a weekly or fortnightly run: every bill due before the next run is paid in this one, together, with a remittance advice to each supplier listing the invoices covered. It takes one session instead of many, makes cash flow predictable, and makes it obvious when a bill has been missed.

Early payment discounts

Some suppliers offer a discount for paying early, such as 2% within 10 days. Whether it is worth taking depends on your cash position, but the annualised value of a small discount for paying a few weeks early is often high. If you are VAT registered, reclaim only the VAT you actually paid when a discount is taken, as the supplier's terms will usually remind you.

Payment practices of larger businesses

Large companies and limited liability partnerships must publish reports on their payment practices and performance twice a year, including how long they take to pay suppliers. If you supply a large business, its published report tells you how quickly it actually pays, which is useful before you agree terms. If you are small and a larger customer pays you late, the Small Business Commissioner can look at payment complaints.

Payables and e-invoicing

From April 2029, VAT invoices must be issued as e-invoices, structured data that goes straight into the buyer's accounting system. For VAT-registered businesses, that means supplier bills will increasingly arrive as data rather than PDFs, with the supplier's details, line items and VAT already captured. Checking bills will still matter; typing them in will matter far less. The e-invoicing hub explains what is known so far.

A worked example

A kitchen fitter receives a merchant's invoice for £1,440 including £240 VAT. She checks it against her order and the signed delivery note, finds one worktop charged twice, and emails the merchant, who issues a credit note for £216 including £36 VAT. She records the invoice and the credit note, reclaims £204 of VAT in her VAT return, and pays the net £1,224 on the due date, quoting both document numbers. The bill, the credit note and the payment record go into her records together.

Paying subcontractors under CIS

If you are a contractor in construction and pay subcontractors, your payables include their invoices, and CIS applies. Before paying a subcontractor for the first time, you verify them with HMRC, then deduct at 20%, 30% or nothing, depending on their status, from the labour part of each payment, and pass the deductions to HMRC. You must give each subcontractor a payment and deduction statement within 14 days of the end of each tax month. Materials, VAT, consumables, plant hire and fuel for the job are not subject to deduction. The CIS calculator shows the deduction on any invoice.

Payables when cash is tight

If you cannot pay a bill on time, tell the supplier before the due date, explain, and propose a plan: part now, the rest by a set date. Most suppliers prefer a clear plan to silence. Prioritise bills that keep the business running and those with the harshest consequences for lateness. Keep to whatever you agree, in writing. And look at the other side of the books: often the fastest way to pay your own bills is to chase what your customers owe you.

Common mistakes

• Paying without checking. Duplicates and overcharges slip through.
• Reclaiming VAT without a valid VAT invoice.
• Losing track of due dates and paying late.
• Changing bank details from an email.
• Not keeping the bills as evidence of costs.
• Paying early without a reason. Paying on the due date, not weeks before, keeps cash in the business for longer at no cost.

Related terms

The opposite side of the books is accounts receivable. A bill you receive is an invoice from your supplier's side; the guide on invoice vs bill explains the two words. Orders often start with a purchase order, and adjustments come through a credit note or your own debit note.

The short version

Accounts payable is what you owe. Check every bill before paying it, pay on time or talk to the supplier before you are late, keep every bill as evidence of your costs and VAT, reconcile supplier statements, and never change payment details on the strength of an email. Handled well, payables are one of the quietest parts of running a business.