Payment Execution: Terms, Methods, Reconciliation, and Controls

Where Payment Execution Fits

Payment execution begins only after an invoice is approved for payment (for example, after matching and exception handling are complete). The goal is to pay the right supplier, the right amount, at the right time, using an approved method—while recording the transaction correctly in the accounting system and maintaining strong controls against error and fraud.

Payment Terms: What They Mean in Practice

Common term formats

• Net 30: the full invoice amount is due 30 days after the agreed base date.
• Net 15 / Net 45 / Net 60: same logic with different day counts.
• 2/10 Net 30 (early payment discount): pay within 10 days to take a 2% discount; otherwise pay the full amount within 30 days.
• Due on receipt: due immediately based on the base date.
• End-of-month (EOM) terms: due a certain number of days after month-end (for example, Net 30 EOM).

Base date: invoice date vs receipt date vs approval date

Terms must be applied to a defined base date. Common bases include:

• Invoice date (most common): terms count from the date on the supplier invoice.
• Receipt date: used when contracts specify payment timing after goods/services are received.
• Approval date: sometimes used operationally for scheduling, but it should not override contractual terms unless explicitly agreed.

In many systems, the payment due date is calculated from the invoice date, while the payment run scheduling uses the approval date to determine when the invoice becomes eligible to pay.

Due-date calculation: step-by-step

1. Confirm the base date (per contract/vendor master settings).
2. Apply the term days (for example, +30 days for Net 30).
3. Adjust for non-banking days based on company policy (for example, if due date falls on a weekend/holiday, pay the prior business day to avoid late payment, or the next business day if allowed).
4. Calculate discount window if applicable (for example, invoice date +10 days for 2/10).
5. Store key dates in the system: discount date, due date, and “pay-from” date (earliest date the invoice can be paid if there are holds or approval timing constraints).

Prioritizing What to Pay: Discount Capture vs Cash Constraints

How to decide what gets paid first

Payment prioritization is typically a balance of (1) avoiding late fees and supply disruption, (2) capturing discounts, and (3) managing cash flow. A practical prioritization approach:

1. Invoices with early payment discounts that are still within the discount window (highest ROI when cash is available).
2. Invoices at risk of becoming overdue (protect supplier relationships and avoid penalties).
3. Critical suppliers/services (utilities, key production inputs, logistics providers).
4. All other invoices scheduled to pay on or near due date.

Evaluating early payment discounts

Early payment discounts can represent a strong implied annual return. For example, 2/10 Net 30 means paying 20 days earlier to save 2%. A simple way to compare is to ask: is the cost of cash (or borrowing) for 20 days lower than the 2% savings? If yes, discount capture is financially attractive.

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Cash flow constraints and payment batching

When cash is tight, organizations may:

• Pay only invoices that are due or discount-eligible.
• Split payment runs (for example, weekly for urgent items, biweekly for standard items).
• Negotiate revised terms with suppliers rather than paying late without agreement.
• Use approved financing tools (for example, supply chain finance) if available and permitted.

Payment Methods: ACH/Bank Transfer, Checks, Virtual Cards

ACH / bank transfer (electronic funds transfer)

How it works: Payment file or instruction is sent to the bank; funds move electronically to the supplier’s account.

• Pros: fast, low cost per transaction, traceable, reduces manual handling, supports remittance data.
• Cons: bank detail fraud risk if supplier master data is compromised; cut-off times and bank holidays affect timing; sometimes limited remittance character length depending on rails.
• Best for: recurring suppliers, higher volumes, domestic payments, and where supplier banking details are stable and verified.

Checks

How it works: Physical check is printed and mailed (or couriered) to the supplier.

• Pros: useful where suppliers cannot accept electronic payments; provides a physical control artifact.
• Cons: slower, higher processing cost, risk of loss/theft, manual effort, check fraud exposure, reconciliation can be slower.
• Best for: low-volume exceptions, certain jurisdictions or supplier preferences.

Virtual cards (single-use or controlled cards)

How it works: A unique card number is generated for a specific supplier/payment amount; supplier charges it like a card transaction.

• Pros: strong controls (amount limits, expiration), reduces bank detail exposure, can simplify supplier onboarding, potential rebates.
• Cons: supplier acceptance varies; card fees may be a concern for suppliers; requires careful remittance matching.
• Best for: one-time suppliers, travel/indirect spend, suppliers with card acceptance, and scenarios where bank details are difficult to validate.

Core Control Points in Payment Execution

1) Payment runs (batching and eligibility controls)

A payment run is a controlled process that selects approved invoices for payment based on rules. Typical controls include:

• Eligibility rules: invoice approved status, no holds, valid vendor, within payment date range, correct currency/bank account.
• Selection parameters: pay date, due date threshold, discount date threshold, payment method, supplier group.
• Exception reporting: invoices blocked due to missing bank details, duplicate payment risk, or unusual amounts.

2) Dual authorization (maker-checker)

Dual authorization separates duties so that no single person can create and release a payment. Common patterns:

• Maker: prepares the payment run and generates the payment file/check batch.
• Checker/Approver: reviews totals, supplier list, and exceptions; releases the payment in the ERP and/or bank portal.
• Bank-level approvals: two approvers required in the bank portal for payments above thresholds.

3) Bank detail change verification

Changes to supplier bank details are a primary fraud vector. Minimum verification practices:

• Out-of-band confirmation: verify changes using a known, previously validated contact method (not the email that requested the change).
• Call-back procedure: call a phone number on file (or from an independent source), document the confirmation.
• Change holds: apply a temporary hold or additional approval for first payment after bank detail changes.
• Audit trail: log who changed what, when, and evidence of verification.

4) Fraud red flags to train for

• Urgent requests to change bank details or “pay today” pressure.
• Email domain lookalikes (for example, subtle spelling changes).
• Bank account in a different country than usual for that supplier.
• Requests to split payments across multiple accounts.
• Invoice/payment instructions that differ from contract or prior remittances.
• Unusual payment amounts, round numbers, or first-time high-value payments.

Remittance Advice: Helping Suppliers Apply Payments Correctly

Remittance advice is the information sent to the supplier explaining what the payment covers. It reduces supplier queries and speeds up their cash application.

What good remittance includes

• Supplier name and supplier account/reference number.
• Payment date, payment method, and payment reference (check number, ACH trace ID, virtual card reference).
• List of invoices paid: invoice numbers, invoice dates, gross amounts, discounts taken, credit notes applied, net paid amounts.
• Any deductions or withholdings with reason codes (if applicable).

How remittance is delivered

• Email remittance PDF/EDI message at the time of payment release.
• Supplier portal download.
• Embedded remittance data in the bank payment reference field (limited by format).

Supplier Statement Reconciliation

Supplier statements summarize what the supplier believes is outstanding: invoices issued, credits, payments received, and the balance due. Reconciling statements helps detect missing invoices, unapplied credits, and misapplied payments.

Practical reconciliation steps

1. Obtain the supplier statement for a defined cut-off date.
2. Compare to your AP ledger: open invoices, open credits, and recent payments.
3. Identify differences and categorize them: missing invoice, missing credit, payment not received, payment applied to wrong invoice, timing differences (in transit), or disputes.
4. Resolve systematically: request backup, reissue remittance, correct application, or initiate trace with bank if needed.
5. Document outcomes and update records (including notes for recurring issues).

How Payments Post to the General Ledger (GL)

At payment time, the accounting system records the settlement of the liability. The exact accounts depend on the organization’s chart of accounts, but the core logic is consistent.

Typical postings

Some systems post the discount automatically at payment; others require configuration so the discount is booked to a specific discount account or reduces the original expense category.

Clearing accounts and bank reconciliation

Organizations may use a cash clearing account when payments are initiated in the ERP but settle at the bank later. Example flow:

• On payment run release: Dr AP / Cr Cash Clearing
• When bank confirms settlement: Dr Cash Clearing / Cr Bank

This supports clean timing between ERP posting and bank statement dates and simplifies bank reconciliation.

Worked Example: Terms, Due Date, Discount Eligibility, and Posting

Scenario

• Invoice number: INV-78421
• Invoice date: 2026-02-03
• Invoice approved date: 2026-02-06
• Amount: $10,000.00
• Payment terms: 2/10 Net 30
• Base date for terms: invoice date
• Company policy for weekends/holidays: if due date falls on a non-banking day, pay on the prior business day

Step 1: Calculate discount deadline

Discount window is 10 days from the invoice date.

• Invoice date: 2026-02-03
• Discount days: +10
• Discount date: 2026-02-13

To take the discount, the payment must be settled by 2026-02-13 (in practice, schedule the payment run early enough to meet bank cut-off times).

Step 2: Calculate net due date

Net due date is 30 days from the invoice date.

• Invoice date: 2026-02-03
• Net days: +30
• Due date: 2026-03-05

If 2026-03-05 were a non-banking day, the company would move the pay date to the prior business day per policy. (In this example, no adjustment is applied.)

Step 3: Decide payment priority

Because the invoice is approved on 2026-02-06, it becomes eligible for payment before the discount date (2026-02-13). If cash is available, prioritize paying by the discount date to save 2%.

Step 4: Calculate payment amount with discount

• Gross invoice: $10,000.00
• Discount: 2% of $10,000.00 = $200.00
• Net payment if discount taken: $9,800.00

Step 5: Execute payment and send remittance

Assume the company schedules an ACH payment to settle on 2026-02-12 (within the discount window). The remittance advice lists INV-78421 gross $10,000.00, discount $200.00, net paid $9,800.00, and includes the ACH trace/reference.

Step 6: Post to the GL (typical entries)

At payment posting (simplified):

Dr Accounts Payable           10,000.00  (clears the liability)  Cr Bank / Cash                 9,800.00  (cash paid)  Cr Purchase Discounts Taken      200.00  (discount benefit)

If the organization uses a cash clearing account, the credit may go to clearing at release and then to bank upon settlement, depending on configuration.