Accounting

What is Accounts Payable (Creditors)?

Accounts payable is money your company owes to suppliers and others. Also called creditors or trade creditors.

Example

You've received £15k of supplies but only paid £10k. You have £5k in accounts payable.

Key Dates

Pay suppliers on time to maintain good relationships

How Accounts Payable (Creditors) Works in Practice

Accounts payable (also called creditors or trade creditors) is the total amount your company owes to suppliers, service providers, and other parties for goods or services received but not yet paid for. It appears as a current liability on your balance sheet. Managing accounts payable effectively is about balancing two priorities: maintaining good supplier relationships by paying on time, and optimising your cash flow by not paying earlier than necessary.

Accounts payable includes money owed to your regular suppliers, utility companies, professional service providers (accountant, solicitor), landlords, and any other parties you owe money to for goods or services. It does not include loans, Corporation Tax owed, or VAT owed -- these are separate liabilities on the balance sheet. PAYE and National Insurance owed to HMRC are also separate from trade creditors.

The creditor days metric (also called days payable outstanding) measures how long you take on average to pay your suppliers. The formula is (Accounts Payable / Cost of Sales) x 365. A higher number means you are taking longer to pay, which preserves your cash but may strain supplier relationships. Under the Reporting on Payment Practices and Performance regulations, large companies must publicly report their payment practices. Small companies are exempt but should still pay fairly.

From a cash flow perspective, accounts payable is effectively free short-term financing from your suppliers. If you receive goods in January on 30-day terms, you have the goods for 30 days before you need to pay. However, paying suppliers late damages relationships, can result in being put on stop (no further deliveries), and some suppliers charge late payment interest. The Late Payment of Commercial Debts (Interest) Act 1998 gives suppliers the right to charge 8% above the Bank of England base rate on overdue invoices.

Step by Step

When you receive a supplier invoice, the expense is recognised on your P&L and the corresponding amount is added to accounts payable on your balance sheet. When you make the payment, accounts payable decreases and your bank balance decreases. The P&L is not affected by the payment -- the expense was already recognised when the invoice was received.

Good accounts payable management involves recording all supplier invoices promptly, matching them against purchase orders or delivery notes, scheduling payments to meet agreed terms (but not earlier), and reconciling supplier statements against your records to catch discrepancies.

At year end, your accountant will review accounts payable to ensure all liabilities are captured. This includes accruals for goods or services received but not yet invoiced (like utilities or professional fees). Accurate accounts payable is important for both balance sheet integrity and Corporation Tax accuracy, since expenses reduce taxable profit.

Practical Tips

Schedule a regular payment run (weekly or fortnightly) rather than paying invoices ad hoc -- this is more efficient and gives better cash flow visibility
Always reconcile supplier statements against your records monthly to catch discrepancies early
Take advantage of early payment discounts when offered -- a 2% discount for 10-day payment is effectively a 36% annualised return
Keep HMRC payments (PAYE, VAT, Corporation Tax) at the top of your priority list -- they charge penalties and interest, and repeated late payment triggers compliance attention

Common Mistakes to Avoid

Paying suppliers much earlier than terms require, which unnecessarily depletes your cash flow
Not recording supplier invoices promptly, which understates expenses and overstates profit until corrected
Ignoring supplier statement reconciliations, which can lead to duplicate payments or missed invoices
Treating all creditors the same -- prioritise paying key suppliers and HMRC on time while managing less critical payments strategically

Frequently Asked Questions

What are standard payment terms in the UK?

The most common payment terms are 30 days from invoice date. Some suppliers offer 14-day terms, while larger suppliers may accept 60 days. Always negotiate terms that work for your cash flow cycle. Government contracts must be paid within 30 days by law.

Can suppliers charge interest on late payments?

Yes. Under the Late Payment of Commercial Debts (Interest) Act 1998, suppliers can charge interest at 8% above the Bank of England base rate on overdue invoices. They can also claim fixed compensation of £40-£100 per late invoice. In practice, small suppliers rarely enforce this.

Is accounts payable the same as expenses?

No. Expenses are costs recognised on the P&L. Accounts payable is the unpaid portion of those expenses sitting on the balance sheet. Once you pay a supplier invoice, accounts payable decreases but the expense has already been recorded on the P&L.

How does accounts payable affect my tax?

Expenses are deductible for Corporation Tax when they are incurred, not when they are paid (under accruals accounting). So accounts payable does not directly affect your tax calculation -- the expense has already reduced your taxable profit. However, ensuring all invoices are recorded ensures you claim all allowable deductions.

Should I take early payment discounts?

It depends on the discount rate and your cash position. A common offer is 2% discount for payment within 10 days vs 30-day terms. This is equivalent to an annualised return of about 36%, which is excellent value if you have the cash available.

Source: HMRC Business Income Manual - deductions: https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim30000

Related Terms

Accounts Receivable (Debtors)

Accounts receivable is money owed to your company by customers who haven't paid their invoices yet. Also called debtors or trade debtors.

Cash Flow

Cash flow is the movement of money in and out of your business. Positive cash flow means more money coming in than going out.

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