Accounts Payable Accounting

What is accounts payable accounting?

Accounts payable accounting (German Kreditorenbuchhaltung, often simply called accounts payable) is the part of financial accounting in which all liabilities to suppliers and service providers are recorded, checked, approved for payment and settled. Creditors (Kreditoren) are business partners who have delivered goods or provided services and whose invoices the company still has to pay. Each creditor is given an individual personal account.

Accounts payable accounting is a subledger of bookkeeping: the details for each supplier are held there, and the general ledger shows only the total on the control account for trade payables. It is the counterpart of accounts receivable accounting and at the same time the last point of control before cash leaves the company: this is where it is decided whether only what was ordered, delivered and correctly invoiced is paid. Investors and buyers read from supplier liabilities how a company manages its liquidity and whether it postpones payments.

Process and tasks of accounts payable accounting

1. Invoice receipt: centrally via a mailbox or portal. Since 2025, domestic businesses in Germany must be able to receive structured e-invoices, that is, invoices as a machine-readable data set under the European standard. A simple PDF file does not count as an e-invoice.
2. Formal check: mandatory particulars under Section 14(4) of the German VAT Act (Umsatzsteuergesetz, UStG) such as invoice number, period of supply and tax rate, together with the bank details.
3. Substantive check: three-way match of purchase order, goods receipt or proof of service, and invoice.
4. Account assignment: allocation to general ledger account, cost centre and period of service.
5. Approval: by the person with technical responsibility, above defined amount limits under the four-eyes principle, that is, with confirmation by a second person.
6. Payment run: at a fixed rhythm, taking due dates and cash discount periods into account, initiated by a different person from the one who approved.
7. Reconciliation: comparison of the open items list, the list of all unpaid invoices, with the control account and, at month end, recording of services received but not yet invoiced.

Controls against payment manipulation

Widespread attempts at deception target accounts payable accounting: genuine-looking invoices with changed bank details or urgent payment instructions that supposedly come from management. Simple rules are effective. A new bank account is adopted only after a call-back to an already known telephone number, and changes to master data are logged and confirmed by a second person. Payments without a purchase order reference and approval are not executed, even if they are described as urgent.

VAT and tax deduction

The company can offset the VAT in incoming invoices against its own VAT liability as input tax. This input tax deduction requires a supply made to the company and a proper invoice (Section 15(1) UStG). If mandatory particulars are missing, the invoice must be corrected before the deduction is claimed. For services from foreign businesses, such as cloud services, software or online advertising, the recipient of the service owes the VAT in many cases (Section 13b UStG). The recipient reports it and, where there is a full right to deduct input tax, deducts it at the same time as input tax. If a cash discount is taken, the tax base falls and the input tax must be corrected for the period of payment (Section 17(1) UStG). For payments to foreign licensors, a tax deduction under Section 50a of the German Income Tax Act (EStG) may be added, which the payer must withhold and remit (withholding tax).

Payment terms, cash discount and liquidity

The payment term is the period the supplier allows for payment, for example 30 days. A cash discount (Skonto) is a price reduction, usually 2% or 3%, for payment within a shorter period. A payment term therefore works like a loan from the supplier, the price of which is the cash discount not taken. The usual commercial approximation estimates its annual interest rate.

Formula: Annual interest rate of the supplier credit (approximation) = cash discount rate × 360 ÷ (payment term minus discount period)

The supplier credit is thus usually several times more expensive than an overdraft facility, the credit line on the business current account. The corresponding metric is the supplier payment period (days payables outstanding, DPO).

Formula: Supplier payment period (DPO) = trade payables ÷ purchase volume of the period × days of the period, both figures gross or both net

A rising supplier payment period can result from improved terms or from tight liquidity. The age structure shows the difference: if overdue items grow, the company is postponing payments. If due liabilities are permanently not paid, this may indicate illiquidity (Zahlungsunfähigkeit, Section 17 of the German Insolvency Code, InsO), which triggers a duty on management to file for insolvency (Section 15a InsO). Accounts payable accounting is therefore one of the most important data sources of liquidity planning.

Worked example: cash discount in accounts payable accounting

An incoming invoice for services received is for EUR 11,900 gross, that is, EUR 10,000 net plus EUR 1,900 VAT. Payment terms: 2% cash discount for payment within 10 days, otherwise 30 days net. The company finances itself through an overdraft facility at an assumed 9% a year.

• Journal entry on invoice receipt (debit to credit): external services 10,000 and input tax 1,900 to creditor 11,900
• Cash discount: 2% of 11,900 = EUR 238; amount paid EUR 11,662
• VAT contained in it: 238 ÷ 1.19 × 0.19 = EUR 38; the input tax falls from EUR 1,900 to EUR 1,862
• Net saving: 238 minus 38 = EUR 200; the expense falls from EUR 10,000 to EUR 9,800
• Journal entry on payment with cash discount: creditor 11,900 to bank 11,662, cash discounts received 200 and input tax 38
• Approximate interest rate of the supplier credit: 2% × 360 ÷ (30 minus 10) = 36% a year
• Interest for payment 20 days earlier: 11,662 × 9% × 20 ÷ 360 = around EUR 58
• Benefit of paying with cash discount: 200 minus 58 = around EUR 142 per invoice

Extrapolated to a purchase volume eligible for cash discount of EUR 1.19 million gross a year, a hundred times the example invoice, the benefit is around EUR 14,200. The VAT portion of the cash discount does not count here, because the input tax would have been offset or refunded anyway. Only the net saving is to be compared with the financing costs.

Creditors in due diligence and purchase price

In due diligence, the open items list of the creditors with age structure, the largest suppliers with their contract terms, and the payments after the reporting date are requested. These payments serve to search for liabilities that already existed at the reporting date but had not been recorded. In addition, investors and buyers examine provisions for outstanding invoices, liabilities to shareholders and related parties, and supply contracts with change-of-control clauses, which give the supplier a right of termination on a change of ownership.

In the purchase price, supplier liabilities take effect through working capital. If the seller postpones payments before closing, working capital falls below the agreed normal level. If a working capital adjustment is agreed, it offsets this liquidity advantage through a lower purchase price. Buyers often treat long-overdue items like financial debt. Quality shows in a supplier payment period close to the agreed terms, few overdue items, documented approval paths and a separation of approval and payment.

Distinctions: accounts payable accounting, liabilities and purchasing

• Liabilities: the broader balance sheet item, which also includes bank loans, tax debts and shareholder loans. Accounts payable accounting records only the trade payables.
• Purchasing: negotiates terms and places orders. Accounts payable accounting checks and pays; the separation of the two tasks is a basic rule of internal control.
• Provisions for outstanding invoices: record services received for which no invoice has yet been received. The basis is open purchase orders and proof of service.

Common mistakes

• Payment without a purchase order reference. Without reconciliation against the purchase order and proof of service, it goes unnoticed if a service was never rendered or was invoiced twice.
• Bank details changed by e-mail. Adopting new bank details without a call-back is a widespread point of attack for diverted payments.
• Missing segregation of duties. Anyone who approves invoices and at the same time initiates payments checks themselves, so that errors and manipulation can remain undetected.
• Letting cash discounts lapse despite available liquidity. At an approximate interest rate of around 36%, a cash discount not taken is an expensive form of financing.
• No accrual at month end. If invoices for services already received are missing, the month shows a result that is too good.
• Overlooked tax liability of the recipient. Invoices from foreign providers without VAT trigger a separate tax liability, which is missing from the advance VAT return if it is not recognised.

Frequently asked questions

Are PDF invoices still permitted in Germany?

For a transitional period yes, but between domestic businesses only for a limited time. For supplies up to the end of 2026, paper invoices and, with the recipient's consent, other electronic formats such as PDF may continue to be used. Businesses with prior-year turnover of up to EUR 800,000 may do so until the end of 2027 (as of 2026). All domestic businesses have had to be able to receive structured e-invoices since 2025.

How many people does a secure accounts payable function need?

At least two for payments above a defined amount limit. Approval and payment initiation must rest with different people; in small companies, management often takes on the second approval.

How do accounts payable and accounts receivable accounting differ?

In the direction of the money. Creditors are suppliers and service providers to whom the company owes money; debtors are customers who owe money to the company. Accounts payable accounting therefore carries liabilities on the equity and liabilities side of the balance sheet, accounts receivable accounting carries receivables on the assets side. The work also differs: for creditors it is about checking, approval and payment, for debtors about invoicing, dunning and default risk.

When is automated invoice processing worthwhile?

As a rule, when invoice volume noticeably strains manual checking or approvals run across several locations. With structured e-invoices, mandatory particulars, purchase order reference and account assignment can largely be checked automatically.

The Roemer Capital view

Investors read overdue supplier liabilities as an early sign of tight liquidity. In preparing a funding round, Roemer Capital therefore reconciles the age structure of the creditors with the liquidity planning and checks whether the reported runway only comes about through postponed payments. A runway of 12 to 18 months at the start of a process is reliable only if suppliers are paid within their payment terms.

Roemer Capital assigns approval limits, the four-eyes principle and protected master data to governance, one of the four pillars on which companies are prepared before a process. In a sale process, Roemer Capital additionally compiles the largest suppliers with their contract terms, so that dependencies and change-of-control clauses are known before the due diligence.