How to manage accounts payable

business.gov.au describes accounts payable as the record of what a business owes in the short term, such as supplier invoices for goods or services and utility bills. Each supplier you owe is a creditor, which business.gov.au defines as someone you buy from on an agreement to pay at a later date.

Whether unpaid bills appear in the books at all comes down to the accounting method. Under cash accounting, business.gov.au says, a cost isn't recorded until the invoice is paid, so the books don't show what you owe. Accrual accounting records costs when they take place rather than when they are paid, so the amounts owing do show. On cash accounting, hold unpaid bills in a folder or on a running list so none is forgotten.

Bills arrive by email, by post and through supplier portals, and a bill left in someone's inbox is a bill nobody has planned for. Choose one place where every supplier bill lands, such as a dedicated email address, and enter each bill soon after it arrives.

For each supplier bill, record:

• the supplier's name and their bill or invoice number
• the bill date and the date payment is due
• the amount
• what was bought, and the account it belongs to in your books
• your purchase order number, if you use them.

Before a bill is approved, check it against what you agreed to buy and against what actually arrived. The purchase order or quote shows the items, quantities and prices you agreed to. The delivery docket, or confirmation that the work was done, shows what you received. The bill should agree with both, and this matching is the main check that you pay only for what you ordered and received.

Here the toner line is the problem: the supplier has charged for cartridges that haven't arrived. Hold that part of the bill and ask the supplier for the missing items or a credit note. A credit note reduces what you owe that supplier, so record it against their account when it arrives.

For services, match the bill to the quote or contract and ask the person who received the service to confirm the work was done. For regular bills such as rent or a subscription, compare each bill with the previous one and look into any change.

A bill is ready to pay once someone who knows what was ordered has checked and approved it. In a small business that may be the owner. Where more than one person handles money, keep approving bills and making payments as separate jobs, so nobody can both approve a bill and pay it.

The ATO says that as the business owner you stay accountable for your record-keeping obligations even when you hand the work to someone else, such as an employee. A note of who approved each bill, and when, is part of a clear record of how money left the business.

Paying each bill the day it arrives takes cash out of the bank sooner than needed, and paying from memory risks missing one. Instead, list approved bills by due date and pay them in planned batches, called payment runs.

business.gov.au names supplier invoices among the payments a business needs to keep track of. It suggests checking each due date, setting reminders or scheduling payments in advance, and reviewing the dates regularly so nothing is missed.

In this example the payment run happens every Thursday, and each bill goes in the last run before it falls due.

Payment terms decide how long you have. business.gov.au suggests negotiating terms with suppliers that suit your business, such as asking for 60 days to pay instead of 30, which lets you keep hold of cash for longer. Paying on the due date, rather than early, uses the terms you agreed.

business.gov.au describes internet banking as the usual way to pay invoices now, and says that automating payments for bills that recur makes errors less likely. Whichever way you pay, pay only from approved bills.

When a payment goes out, record it against the bill it pays, not just as money leaving the bank. That is what moves the bill from unpaid to paid and keeps each supplier's balance right. Putting the supplier's bill number in the payment reference helps the supplier match it too.

• If one transfer pays several bills, allocate it across each of them.
• If you pay part of a bill, record the part payment so the rest still shows as owing.
• Apply a credit note to the bill it relates to, or to the supplier's balance, as soon as you receive it.

Your regular bank reconciliation then confirms that each payment recorded in the books actually left the bank.

Many suppliers send a monthly statement listing the bills they have issued, the payments they have received and the balance they say you owe. Compare it with your own record for that supplier each time one arrives. Differences usually come from:

• a payment you made near the end of the month that the supplier hadn't received by the statement date
• a bill on the statement that never reached you, or hasn't been entered yet
• a credit note the supplier issued that isn't in your books, or one you recorded that the supplier hasn't
• a bill entered twice, or a payment recorded against the wrong supplier or the wrong bill.

Once every difference is explained, ask the supplier for a copy of any bill you are missing, then check and approve it like any other. Pay the bills you have approved rather than the statement balance, so a disputed or duplicated amount isn't paid along with the rest.

The end of the financial year, 30 June in Australia, is a natural point for a full review of unpaid bills. business.gov.au's year-end checklist includes a review of who you owe money to. Look for:

• bills still unpaid well after their due date, and the reason
• old credit notes or overpayments that should be used up or refunded
• balances owing to suppliers you no longer use
• bills for goods or services received before the year end that haven't been entered, which your accountant may ask about.

File supplier bills, approvals and payment records with the rest of the business's records, along with the year-end list of creditors. business.gov.au puts the usual keeping period for business records at 5 years. The Corporations Act counts invoices and payment orders among a company's financial records, which a company has to keep for 7 years after the transactions they cover are completed.

If bills are piling up, take note: business.gov.au names finding it hard to pay suppliers, and delaying supplier payments, among the signs that cash flow is under pressure. Its suggestions for improving cash flow include arranging a payment plan for larger costs.