A sound set of accounts payable procedures moves every vendor bill through the same sequence: match the supporting documents, record the liability, route it for approval, pay it, and archive the packet. Controls sit at each step so that errors get caught, fraud requires collusion, and the company can prove to an auditor or the IRS that every dollar leaving the building was owed.
Start With the Three-Way Match
Every payable rests on three documents that must agree before anyone approves payment.
- The purchase order, created by the buying department, locks in what was ordered, the quantity, and the agreed price.
- The receiving report, generated when goods arrive, records the actual quantity delivered and the condition of the shipment.
- The vendor invoice, sent by the supplier, states the amount due and the payment deadline.
Compare all three line by line. Quantities on the PO should match the receiving report; unit prices should match the invoice. When a vendor ships 480 units but bills for 500, or charges more than the PO specified, the match catches it before the bill is ever recorded. Skipping this step or treating it as a formality is where overpayments and billing fraud get their foothold.
Some companies add an internal voucher that consolidates the matched data onto one cover sheet with the vendor ID, approved total, and general ledger account codes, giving the person entering the transaction everything in one place.
Recording the Payable
Once the match clears, the bookkeeper enters the invoice into the accounting system. That entry creates a recognized liability on the balance sheet and increases the accounts payable control account. Coding matters: the expense has to land in the correct general ledger account so financial statements and departmental budgets stay accurate.
Two fields deserve extra attention. The invoice number must be unique for that vendor; duplicating it is the most common cause of paying the same bill twice. The invoice date and payment terms drive when the system considers the bill due. Enter those wrong and you either miss discount windows or rack up late charges, which typically run 1% to 2% of the overdue balance per month.
Data entry also feeds the aging report, which sorts outstanding payables into buckets: current, 1–30 days, 31–60 days, 61–90 days, and over 90 days. That report predicts upcoming cash needs and flags invoices falling through the cracks. If the 60-plus column keeps growing, the problem is almost always upstream in matching or approval.
Early Payment Discounts
Many vendors offer a discount for paying ahead. The common structure is “2/10 net 30”: 2% off if you pay within 10 days, otherwise full amount at 30. Two percent for accelerating payment by 20 days annualizes to roughly 36.7%, which makes it one of the cheapest sources of return a company can capture. Companies with available cash should almost always take these discounts, which means the workflow has to move an eligible invoice through matching and approval before day 10. If invoices routinely sit in a queue past that point, the process is effectively burning money.
Approval and Separation of Duties
No single person should be able to create a vendor, record an invoice, approve the payment, and sign the check. That concentration of authority is the textbook setup for embezzlement. At minimum, the person who enters invoices should not be the person who authorizes payments, and neither should be able to modify vendor bank details.
The approved payment packet, containing the matched documents and internal voucher, moves to a department head or designated officer who confirms the purchase was legitimate and within budget. Electronic approval workflows have largely replaced physical signature routing and produce a timestamped trail showing who approved what and when.
Publicly traded companies have no discretion here. Federal law requires each annual report to include a management assessment of internal controls over financial reporting, with an independent auditor attesting to that assessment.1Office of the Law Revision Counsel. United States Code Title 15 – Section 7262 Management Assessment of Internal Controls Private companies are not bound by the same statute, but the COSO framework, widely adopted as the benchmark for internal control design, expects the same separation of duties, and any auditor evaluating the process will look for it.
Vendor Onboarding, W-9s, and 1099 Thresholds
Collect tax information before you cut the first check, not in January when 1099s are due. Every service provider who is not a corporation should complete a Form W-9 giving you their legal name, address, and taxpayer identification number. If a vendor fails to provide a valid TIN, you are required to withhold 24% of each payment and remit it to the IRS as backup withholding, and if you fail to withhold when required, you become personally liable for the uncollected amount.2Internal Revenue Service. Instructions for the Requester of Form W-9
For tax year 2026, the threshold for reporting nonemployee compensation on Form 1099-NEC increased to $2,000, up from the long-standing $600 floor, and will be adjusted for inflation starting in 2027. Forms must be filed with the IRS and delivered to the recipient by January 31 of the year following payment.3Internal Revenue Service. Publication 1099 (2026), General Instructions for Certain Information Returns
A clean onboarding routine prevents year-end scrambling. Require a completed W-9 before activating the vendor. Validate the TIN through the IRS matching tool. Record the entity type from the W-9 so the system automatically flags vendors who will need a 1099.
Protecting the Vendor Master File
The vendor master file holds every vendor’s name, address, and bank routing information. Altering a single bank account number redirects every future payment, which is exactly how many business email compromise schemes work. The AP clerk who processes invoices should never have the ability to add new vendors or change payment details. Changes should require a second person’s authorization, and every change request should be verified by calling the vendor at a phone number already on file, not the number in the email requesting the change.
At least annually, someone outside the daily AP function should review the master file to clear duplicate entries and deactivate vendors that have not been used. Dormant records are a favorite hiding place for fictitious vendors created by insiders.
Bank-Level Payment Controls
Two banking services add a layer that internal controls alone cannot provide. Positive Pay is a check fraud tool: the company uploads a file of every check it issues, including check number, amount, and payee name, and the bank cross-references presented checks against that list. Anything that does not match is held until the company approves or rejects it. Payee-level Positive Pay also verifies the payee name, which catches check washing.
For electronic payments, ACH debit blocks and filters play the same role. A block prevents any unauthorized ACH withdrawal from hitting the account. A filter pre-authorizes specific trading partners and amounts so that only expected debits clear. Both tools are inexpensive relative to the losses they prevent.
Executing the Payment
When approvals are complete and the due date arrives, the AP team runs the payment batch. The method affects both cost and speed.
- Paper checks remain common for smaller vendors but are the most expensive option once printing, postage, and bank fees are counted. All-in processing costs typically land between $2 and $5 per check.
- Wire transfers suit large or time-sensitive payments. The Fedwire system provides same-day finality, which is why wires are standard for real estate closings and large vendor settlements. Banks typically charge $25 to $30 for a domestic outgoing wire, with international wires higher.4Federal Reserve Financial Services. Fedwire Funds Service
- ACH transfers are the workhorse for recurring domestic payments. Fees usually fall between $0.26 and $0.50 per transaction, making ACH the cheapest electronic option by a wide margin. Settlement takes one to two business days rather than being same-day.
As each payment processes, the system marks the invoice paid, moves the entry from the payable ledger to the cash disbursement journal, and reduces both cash and the outstanding liability. A remittance advice going to the vendor prevents your payment from being misapplied and short-circuits unwarranted collection calls.
Catching Duplicate Payments
Duplicates happen when the same invoice gets entered twice under slightly different references, when a vendor resubmits an invoice that was already paid, or when a credit memo is missed. They often go unnoticed for months because the vendor has no incentive to flag an overpayment.
Prevention starts at data entry: the accounting system should reject any invoice number that already exists for the same vendor. Beyond that, periodic audits scanning for matching amounts, dates, and vendor combinations catch what the front-end controls miss. Recovering the money means contacting the vendor with documentation and requesting a refund or credit against future invoices. The longer overpayments sit, the harder they are to recover, especially if the vendor relationship has ended. Running a duplicate payment audit at least annually recaptures money that would otherwise stay lost.
Record Retention
The IRS requires businesses to keep financial records for at least three years from the date the return was filed. That extends to six years if the business underreported income by more than 25%, and to seven years for claims involving worthless securities or bad debt deductions.5Internal Revenue Service. How Long Should I Keep Records Most companies default to a seven-year policy to cover the longest window without evaluating each record individually.
Digital or physical, the filing system should let someone pull a complete payment packet, from PO through canceled check, within minutes. Organizing by vendor is the most common approach, since audit and dispute inquiries almost always start with “show me everything we paid to Vendor X.” During an external audit, these records are the primary evidence that every cash outflow corresponded to a legitimate, approved business expense.
Uncashed Checks and Escheatment
When a vendor check goes uncashed, the money does not revert to your company. Every state has unclaimed property laws that eventually require businesses to turn dormant funds over to the state through escheatment. For commercial checks, the dormancy period ranges from two to five years depending on the state, with three years the most common threshold.
Before escheating, businesses must make a good-faith effort to contact the payee. Most states require a written notice sent by first-class mail, typically 60 to 120 days before the reporting deadline. The letter must identify the property and inform the payee that the funds will be transferred to the state if there is no response. A few states impose stricter rules, such as certified mail above certain thresholds.
Companies get tripped up here not because the rules are complicated but because nobody is watching. An uncashed check sits in a reconciliation exception report, someone assumes the vendor will eventually deposit it, and three years later the company has an unreported escheatment liability. Run a report of outstanding checks older than 90 days each quarter, investigate why they were not cashed, and start the due diligence clock for anything that cannot be resolved.
Month-End Reconciliation
The cycle does not end when individual invoices are paid. At month-end, the AP balance in the general ledger must match the detail in the accounts payable subledger. When those two numbers disagree, something was recorded incorrectly, and the financial statements are wrong until it is fixed.
Start by comparing the AP subledger balance to the general ledger control account. Pull vendor statements and match them against internal records, invoice by invoice. Mismatches usually come from invoices that arrived but were not yet entered, payments recorded in the wrong period, or credit memos applied incorrectly. Each discrepancy gets investigated and corrected before the books close.
Reconciliation is also where the aging report earns its keep. Growth in the 60-day and 90-day columns signals either approval bottlenecks or disputed invoices no one is resolving. Catching those trends monthly, rather than at year-end, gives management time to fix the underlying process before it affects vendor relationships or cash flow forecasting. A second person should review and sign off on the final reconciliation, both as a control against errors and as documentation that the process was actually performed.