B1: 6.02 Payments to suppliers

When a business makes a payment to a credit supplier we will record the payment in the the Cash Book. That payment will then be posted to the Purchases Ledger Control Account in the General Ledger and to the relevant supplier account in the Purchases Ledger.

Keeping supplier’s accounts up to date will help a business calculate the right amount to pay its credit suppliers. In deciding the amount to pay a supplier, a business must consider the following:

  • The business’ payment policy
    • Most businesses have a general payment policy that guides how they will pay their suppliers. Some for example, will simply pay their suppliers on time, others might pay faster in order to gain prompt payment discounts and so on…
  • The terms and conditions offered by the suppliers
    • Different suppliers can offer different terms and conditions. Common periods of credit include:
      • A specified number of days from the invoice date; e.g. “net 30 days credit” means the full amount should be paid in 30 days
      • Monthly credit terms where payment should be made by a particular date in the month following the invoice
      • Prompt payment discount; e.g. “net 30 days, 2% 10 days” would mean that payment is due in 30 days but a 2% discount may be taken if payment is made within 10 days
  • Credit notes
    • When paying an invoice, a business will identify if there is a credit note associated with that invoice. If so, the business should pay the net the amount (i.e. the invoiced amount less the amount on the credit note).
  • Disputed invoices
    • If an invoice is disputed in part or in total, a business must consider whether it should be paid before the dispute is resolved.
    • The business must also ensure that the supplier is aware that an amount is under dispute and will not be paid for the time being or else they will simply try to collect the invoiced amount
  • The availability of prompt payment discounts
    • If a business is to take advantage of a prompt payment discount it will have to calculate the discount that may be taken and deduct this amount from the payment
  • Supplier statements
    • Most suppliers issue Statements of Account to credit customers which provide businesses with the chance to check the amount whether both businesses believe the same amount is outstanding
      • If an error has been made by the business, it should correct its records as necessary
      • If an error has been made by the supplier, the business should inform the supplier of the error (even if the error is in the business’ favor)

Illustration: Checking a Statement of Account received from a supplier

When a Statement of Account is received from supplier, a business will first check it against the supplier’s account in the Purchases Ledger.

Let’s say a business, Harlequin, has received the above statement of account from its supplier, Skull Industries. Harlequin’s accountant will compare the statement against Skull Industries account in the Purchases Ledger (see below)

The accountant will first check whether the opening position is agreed. At 1st February both the Statement and the supplier’s account record £4,897 as being outstanding.

The accountant can then check the bank payments. Here we can see that a payment of £4,660 is recorded in both the Statement and the supplier’s account. You will note however, that they are dated slightly differently (i.e. 25th February and 27th February). This is a common issue when checking Statements and occurs as there is often a short delay between the issue of a payment by a customer and its receipt by the supplier.

The accountant will then check the invoices and credit notes received during the period. Whilst invoice 678 and credit note 39 are recorded correctly in both the Statement and the supplier’s account there is a difference in respect of invoice 659 (dated 10th February). On the Statement the amount is recorded as £1,770 but in the supplier’s account it is recorded as £1,700. The accountant should therefore examine the supplier’s invoice 659 and check which is correct. If Harlequin’s books are incorrect they should be corrected, otherwise Skull Industries should be informed of their error.

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