Module 6: Accounts Payable & Bills

Where we are in the workflow: This module runs alongside Categorize it and Reconcile it, but on the other side of the ledger from Module 2. A/R was about money owed to the business. A/P is about money the business owes to its own vendors: Bill it → Track it → Pay it → Report it.

Module goal: You will be able to enter vendor bills correctly, pay them through QBO's Pay Bills workflow, handle vendor credits, run and interpret the A/P Aging report, track 1099 contractors, and help a client decide which bills to pay first when cash is tight.

Running case continues: Bright Path Cleaning Co. is growing. Dana Reyes has started using a part-time subcontractor and a monthly supply vendor who both invoice her instead of being paid on the spot. She says, "I keep forgetting to pay people back. Can you help me get this under control?"

Key Terms for This Module

• Accounts Payable (A/P): money the business owes its vendors for goods or services already received.
• Bill: a vendor's request for payment, entered with a due date. The A/P counterpart of a customer invoice.
• Vendor: anyone the business pays for goods, services, or labor. In QBO, vendors and customers are separate lists.
• Terms: how long the business has to pay a bill (for example, Net 30).
• Bill Payment: the transaction that pays down one or more open bills.
• Vendor Credit: a reduction of what's owed to a vendor, for a return or an overbilling.
• 1099 vendor / contractor: a non-employee vendor the business may need to report payments for at year-end.
• Aging (A/P): how long each bill has been unpaid, grouped into time buckets, mirroring A/R aging from Module 2.

Lesson 6.1: Entering Bills

Learning Objectives

• Explain the difference between a Bill and an Expense in QBO.
• Explain what happens in the books when a bill is entered.
• Enter a bill correctly, including terms and due date.

Content and Theory

QBO gives you two ways to record something the business bought: an Expense (paid immediately, by card or debit, which you've been categorizing since Module 3) and a Bill (received now, paid later). The difference is timing, and it matters for the same reason invoices matter on the customer side.

What QBO records behind the scenes for a $180 bill from a supply vendor:

• Debit Cleaning Supplies Expense $180 (the cost is incurred now)
• Credit Accounts Payable $180 (the business owes the vendor)

Notice that no cash moved. Just like an invoice, a bill only records that the business owes money. The bank balance doesn't change until the bill is paid.

When to use a Bill instead of an Expense:

• The vendor sent an invoice with terms (Net 15, Net 30) instead of charging a card on the spot.
• The business wants to track what it owes, and to how many vendors, at any moment.
• The expense should be recognized now (accrual basis) even though payment happens later.

If a client always pays vendors immediately by card or debit, most of their spending will stay as Expenses (Module 3), and A/P will rarely be used. A/P becomes important once a business has recurring vendors who bill on terms.

Step-by-Step Walkthrough

1. Click + New, then Bill.
2. Select the vendor. If they're new, add them to the vendor list, following the same naming-standard discipline as customers (Lesson 1.2).
3. Confirm the bill date (the date on the vendor's invoice) and the terms, which set the due date automatically.
4. Enter the vendor's bill number in the reference field if they provide one. It helps avoid paying the same bill twice.
5. Add line items: category (or item) and amount, using the same categorization judgment from Module 3.
6. Attach a photo or PDF of the vendor's invoice if you have one.
7. Save.

Real-World Example

Apex Linen Service now bills Bright Path monthly for uniform and towel rental instead of Dana paying by card. Their invoice, dated October 1, shows $95.00, terms Net 15.

Solution breakdown:

• Enter a Bill for Apex Linen Service, dated October 1, terms Net 15 (due October 16).
• One line: Cleaning Supplies (or a new Uniforms and Linen sub-account if Dana wants that visibility), $95.00.
• Result: Accounts Payable increases by $95.00, and October's expenses already reflect the cost, even though nothing has been paid yet.

Best Practices and Common Pitfalls

• ✅ Enter the bill date as the date on the vendor's invoice, not the day you happen to enter it.
• ✅ Always record the vendor's bill number. It's your best defense against double payment.
• ✅ Use the same categorization logic from Module 3: what was it for, not just who was paid.
• ⚠️ Don't enter something as a Bill if it was already paid by card or debit. That belongs in Expenses, and entering it as a Bill would leave a phantom balance in A/P.
• ⚠️ Don't create a new vendor record for a vendor who already exists under a slightly different name. Check the list first (same discipline as Lesson 1.2).

Tool Translation: In Xero, this is a Bill (Business, then Bills to pay, then New bill), with the same date, due date, and line-item structure.

Sheets companion: A "Vendor Terms Sheet" listing each vendor on terms, their usual amount, and their payment terms, so nothing is a surprise.

Lesson 6.2: Paying Bills

Learning Objectives

• Pay one or more bills correctly through the Pay Bills workflow.
• Explain why paying a bill is not a new expense.
• Record a partial bill payment.

Content and Theory

Paying a bill works exactly like the A/R side in reverse (Lesson 2.3). The expense was already recorded when the bill was entered. Paying it only moves money:

• Debit Accounts Payable (the business owes less now)
• Credit Bank (cash goes out)

This means paying a bill is never itself an expense, the same way receiving a customer payment is never itself income (Lesson 2.3). If you categorize a bill payment to an expense account, the cost gets counted twice: once when the bill was entered, and again when it was paid.

Two ways bill payments show up in the bank feed:

• QBO-initiated payment (a check printed from QBO, or an online bill-pay feature): the payment and the feed line should match.
• Payment made directly with the bank or a card, outside QBO: you still use Pay Bills in QBO to apply it to the right bill, then match the feed line to that payment.

Never pay a bill by just categorizing the bank feed line as an expense. That bypasses A/P entirely, leaves the bill looking open forever, and double-counts the cost.

Step-by-Step Walkthrough

1. Click + New, then Pay Bills.
2. Select the payment account (checking) and the payment date.
3. Tick the bill(s) being paid. For a partial payment, edit the Payment amount for that bill.
4. Confirm the total payment amount matches what actually left the bank.
5. Save.
6. When the bank feed shows the payment, match it to the bill payment you just created (Lesson 3.2's match-vs-categorize logic applies here too).

Real-World Example

On October 14, Dana pays the Apex Linen bill ($95.00) and a $340.00 bill from a pest control vendor in one online banking session, so both leave the account together.

Solution breakdown:

1. Use Pay Bills, tick both bills, confirm the total is $435.00, and save.
2. When the $435.00 line appears in the bank feed, match it to the bill payment. Do not categorize it as an expense.
3. Both bills now show Paid, and A/P is reduced by $435.00.

Best Practices and Common Pitfalls

• ✅ Always pay through Pay Bills, even for a payment made outside QBO, so it applies to the right bill.
• ✅ Use the actual payment date.
• ⚠️ Never categorize a bill payment in the bank feed as a new expense. Match it.
• ⚠️ If a bill was entered twice by mistake, paying it will look normal but overstates both the expense and A/P. Check for duplicate bill numbers before paying.

Tool Translation: In Xero, use Pay Bills from the Bills to pay list, or batch payments for several bills at once, then reconcile the bank line to the batch payment.

Sheets companion: A "Bills Due This Week" tab pulled from the A/P Aging report (Lesson 6.4), reviewed before each banking session.

Lesson 6.3: Vendor Credits and Refunds

Learning Objectives

• Distinguish a vendor credit from a refund.
• Create and apply a vendor credit.
• Record a refund of money already paid to a vendor.

Content and Theory

This mirrors Lesson 2.6, but from the vendor's side.

• Vendor credit: reduces what the business owes a vendor. No cash moves. Used when a bill hasn't been paid yet, or to offset a future bill.
• Vendor refund (or a credit card credit): money comes back from a vendor for something already paid. Recorded as a deposit or a credit card credit, tied to the original expense category.

Choosing the right one:

• A bill hasn't been paid, and the vendor is reducing the amount owed: vendor credit, applied when you next pay that vendor.
• The business already paid and is getting money back: refund, recorded against the bank or card the refund landed in.

Step-by-Step Walkthrough

Vendor credit

1. Click + New, then Vendor credit.
2. Select the vendor, the date, and the category or item being credited, matching the original bill's category.
3. Save.
4. Next time you use Pay Bills for that vendor, the credit appears and can be applied against an open bill.

Vendor refund

1. If it came back to a bank account, record it as a deposit, categorized to the same expense account the original purchase used (this reduces that expense rather than creating income).
2. If it came back as a credit on a business credit card, use + New, then Credit card credit, with the same category logic.

Real-World Example

The pest control vendor overbilled Bright Path by $40.00 on an unpaid bill. They issue a credit rather than a corrected invoice.

Solution breakdown: Enter a $40.00 vendor credit for that vendor, categorized the same way the original bill was. When Dana next pays that vendor, the $40.00 credit is available to apply, reducing the payment due.

Best Practices and Common Pitfalls

• ✅ Match the credit's category to the original bill's category so the expense correction lands in the right place.
• ✅ Review open vendor credits periodically. A forgotten credit means the business is effectively owed money it isn't collecting.
• ⚠️ Don't record a vendor refund as income. It offsets the expense.
• ⚠️ Don't enter a vendor credit for something that was never actually billed. Confirm against the original bill first.

Tool Translation: Xero uses a credit note from the supplier, allocated to a bill the same way a customer credit note is allocated to an invoice.

Sheets companion: Add a "Vendor Credits" tab alongside the Credits and Refunds Log from Module 2, so both directions are tracked in one place.

Lesson 6.4: A/P Aging

Learning Objectives

• Run the A/P Aging Summary and Detail reports.
• Tie A/P Aging to the Balance Sheet, the same discipline as A/R.
• Use aging to decide what needs to be paid soon.

Content and Theory

The A/P Aging report is the mirror image of the A/R Aging report from Lesson 2.7. Instead of "who owes us," it answers "who do we owe, and how soon?"

Same bucket structure: Current, 1–30, 31–60, 61–90, 91+ days past due, based on each bill's due date. Same two versions: Summary (one line per vendor) and Detail (one line per bill).

The same integrity check applies: the A/P Aging Summary total, run as of a specific date, should equal the Accounts Payable balance on the Balance Sheet for that date and basis. If they don't match, something was posted to A/P outside a normal bill or bill payment, and it needs investigating before you report anything to the client.

Step-by-Step Walkthrough

1. Go to Reports and search for Accounts payable aging summary.
2. Set the report date (commonly month-end, or today for a "what's due" check).
3. Review the oldest buckets first, and note anything approaching its due date this week.
4. Open the Detail version to see individual bills, and click into anything unclear.
5. Run the Balance Sheet for the same date and compare the A/P line to the aging total.

Real-World Example

As of October 31, Bright Path's A/P Aging Summary shows: Apex Linen $95.00 (Current), Pest control vendor $300.00 (Current, after the $40.00 credit), and a supply vendor $212.40 (1–30 days past due, missed by accident). Total: $607.40.

Solution breakdown: The Balance Sheet A/P should also read $607.40 on October 31. The supply vendor bill is overdue and should be paid immediately, both to stay current with a vendor Bright Path relies on weekly, and because a habit of missed A/P payments can hurt a small business's standing with its suppliers.

Best Practices and Common Pitfalls

• ✅ Check A/P aging before every banking session so nothing quietly goes overdue.
• ✅ Tie it to the Balance Sheet every time, exactly like A/R.
• ⚠️ Don't let a vendor's aging run long without a reason. Unlike a customer who might be slow to pay, an overdue vendor bill is the business's own responsibility to fix.

Tool Translation: Xero's equivalent is the Aged Payables report, with the same bucket structure.

Sheets companion: A "Bills Due This Week" view, filtered from the aging detail, reviewed at the start of each week.

Lesson 6.5: 1099 Vendors and Contractor Tracking

Learning Objectives

• Explain what a 1099 vendor is and why tracking matters.
• Mark a vendor as 1099-eligible and collect the information needed.
• Run a basic contractor payment report.

Content and Theory

In the United States, a business that pays an unincorporated contractor a threshold amount or more in a calendar year for services generally needs to report those payments to the tax authority, using a W-9 collected from the contractor and a 1099 form issued after year-end. The exact dollar threshold changes from time to time, so always confirm the current figure rather than relying on memory, and this is ultimately the client's tax preparer's call, not the bookkeeper's.

Your role as the bookkeeper or VA: keep the underlying data clean all year, so that whoever prepares the 1099s at year-end (the client, their tax preparer, or QBO's own filing feature, where available) has accurate, complete numbers instead of a scramble in January.

What "clean" means:

• Every contractor is entered as a vendor (never as an employee, and never mixed into the customer list).
• Each contractor's vendor record is marked as eligible for 1099 where QBO offers that setting, with their W-9 information (legal name, address, and taxpayer ID) on file.
• Payments to them are consistently categorized (commonly Contract Labor, as seen back in Module 3), so the total is easy to pull.
• Payments made by credit card or a third-party processor are generally excluded from 1099 totals, since the processor handles that reporting. QBO's 1099 tools generally account for this automatically when payment methods are recorded accurately, but it's worth understanding why the number might look different from a simple "total paid" figure.

Step-by-Step Walkthrough

1. When adding a new contractor as a vendor, check the "Track payments for 1099" box (naming varies slightly by version) and enter their W-9 details: legal name, address, and taxpayer ID (SSN or EIN). Never store a taxpayer ID anywhere outside QBO's own secure fields — not in a spreadsheet, not in a note.
2. Confirm the payment method is recorded accurately on each bill payment or expense (bank transfer or check versus credit card), since this affects what counts toward the 1099 total.
3. Periodically run Reports, then search for "1099 Contractor" or similar, to review year-to-date totals per contractor and catch anything that looks off early, rather than at year-end.
4. Flag any contractor approaching the reporting threshold so the client can plan for it, and remind the client that final 1099 preparation and filing decisions belong to them and their tax preparer.

Real-World Example

Dana's new subcontractor, Jamie Ortiz, is paid $150.00 to $300.00 a month by bank transfer for extra cleaning shifts.

Solution breakdown: Add Jamie as a vendor (not an employee), mark the record for 1099 tracking, and collect a W-9 before the first payment if possible; it's much harder to get later. Categorize every payment to Contract Labor consistently. Check the running total periodically so there are no surprises when Dana's tax preparer asks for the year's contractor totals.

Best Practices and Common Pitfalls

• ✅ Collect the W-9 before the first payment goes out, when possible.
• ✅ Keep contractor categorization consistent all year, not cleaned up once in December.
• ✅ Confirm current thresholds and filing rules with the client's tax preparer. Rules and dollar amounts can change.
• ⚠️ Never guess at a taxpayer ID or leave it blank indefinitely. Follow up.
• ⚠️ Don't treat a contractor who works set hours, uses the business's equipment, and takes direction like an employee as a 1099 vendor. Worker classification is a legal question for the client and their advisor, not a bookkeeping judgment call.

Tool Translation: Xero has a similar contact-level 1099 (or regional equivalent) tracking setting, with its own contractor payment reports.

Sheets companion: A "W-9 Tracker" listing each 1099 vendor, whether their W-9 is on file, and their running year-to-date total. Never store the taxpayer ID itself in the spreadsheet.

Lesson 6.6: Managing Cash Flow with A/P

Learning Objectives

• Use A/P aging alongside the bank balance to plan payments.
• Help a client prioritize bills when cash is tight.
• Know where a VA's role ends and the client's decision begins.

Content and Theory

Entering and paying bills correctly (Lessons 6.1 and 6.2) is mechanical. Deciding what to pay, and when, is where A/P becomes genuinely useful to a client. This is the AP mirror of Module 2's collections work: instead of chasing money in, you're planning money out.

A simple weekly cash flow check:

1. Check the current bank balance.
2. Run A/P Aging and list what's due in the next 7 to 14 days.
3. Check A/R Aging for money reasonably expected to come in during the same window (Module 2).
4. Compare the three. If bills due soon exceed the bank balance plus expected collections, flag it.

When cash is tight, a reasonable priority order (to discuss with the client, never decided unilaterally):

• Anything with a hard deadline or a penalty for lateness (payroll obligations, loan payments, taxes).
• Vendors critical to keeping the business running (the supplier Bright Path needs every week).
• Vendors with a strong relationship who could tolerate a short delay, communicated proactively rather than silently missed.
• Anything that can genuinely wait a cycle without damaging the relationship.

Your role and its limits: You can prepare the picture, run the numbers, and flag a coming shortfall early. You do not decide which vendors get paid late, negotiate payment plans on the client's behalf, or promise a vendor anything, without the client's direction. This mirrors the collections boundary from Lesson 2.8.

Step-by-Step Walkthrough

1. Every week, pull the bank balance, the A/P Aging Detail, and the A/R Aging Detail.
2. Build a short list: bills due this week and next, and expected receivables in the same window.
3. If everything comfortably covers, proceed with Pay Bills as normal (Lesson 6.2).
4. If it's tight, prepare a short, factual summary for the client rather than deciding on your own, and present the priority framework above as options.
5. Record the client's decisions, and follow up on any vendor communication they've asked you to send.

Real-World Example

Dana texts: "I just got a $600 bill from my accountant and I'm not sure I can cover everything this week." Her bank balance is $780.00. A/P Aging shows the $600 accountant bill (due in 5 days) and the recurring $95.00 Apex Linen bill (due in 3 days). A/R Aging shows Northside Dental's $900.00 invoice, due in 6 days, with no history of late payment.

Solution breakdown:

• Total due in the next week: $695.00. Current bank balance: $780.00. It covers both bills, barely, before Northside's payment even arrives.
• Present this clearly to Dana: "You can cover both the Apex and the accountant bill this week with your current balance. Northside's $900 is expected in 6 days and isn't needed to cover these two, but keep an eye on it in case anything else comes up."
• You are not deciding for her. You're giving her the full picture so she can decide with confidence.

Best Practices and Common Pitfalls

• ✅ Do this check weekly for any client whose cash is ever tight, not just when they ask.
• ✅ Present numbers and options, not decisions made on the client's behalf.
• ✅ Flag a likely shortfall as early as possible. Advance warning is far more useful than a same-day surprise.
• ⚠️ Don't assume A/R money will arrive on time. Weight it by the customer's actual payment history.
• ⚠️ Don't contact a vendor about a late or reduced payment without the client's explicit go-ahead.

Tool Translation: Xero doesn't have a single built-in "cash flow" report as standard on every plan, but comparing Aged Payables, Aged Receivables, and the bank balance works the same way.

Sheets companion: A simple "Weekly Cash Check" tab: bank balance, bills due in 7/14 days, expected receivables in the same window, and the resulting cushion or shortfall.

Module 6 Knowledge Check

Answer each question. Your answers are checked only when you click Check answers — nothing is revealed until then.

Module 6 Practical Exercise: Set Up and Run Bright Path's A/P

Scenario: Dana writes: "I've started getting real bills instead of just paying with my card. Can you get this set up properly and tell me what I owe and when?" Work in the same practice file you've used throughout the course.

Bills to Enter

1. Apex Linen Service (new vendor): Bill dated Oct 1, terms Net 15 (due Oct 16), $95.00, category Cleaning Supplies.
2. GreenGuard Pest Control (new vendor): Bill dated Oct 3, terms Net 30 (due Nov 2), $340.00, category a new account, Pest Control.
3. Sunset Cleaning Supply (existing vendor from Module 3): Bill dated Oct 5, terms Net 15 (due Oct 20), $212.40, category Cleaning Supplies. (Note: earlier modules had Dana paying Sunset by card. This time, assume Sunset offered her terms instead.)

Other Events

• Oct 8: GreenGuard sends a $40.00 vendor credit for an overbilled service call in September. Enter it as a vendor credit against GreenGuard.
• Oct 14: Dana pays Apex Linen ($95.00) in full through online banking. The bank feed shows a single $95.00 payment that day.
• Sunset Cleaning Supply's Oct 5 bill is not paid and becomes overdue after Oct 20.
• Jamie Ortiz (new vendor, subcontractor): paid $175.00 by bank transfer on Oct 12 for extra shifts, categorized to Contract Labor. Mark Jamie as a 1099 vendor.

Tasks

1. Set up the three new vendors (Apex Linen, GreenGuard, Jamie Ortiz), following the naming standard from Lesson 1.2. Mark Jamie for 1099 tracking.
2. Enter the three bills from the list above, with the correct dates, terms, and categories, creating the new Pest Control expense account as needed.
3. Enter the GreenGuard vendor credit for $40.00.
4. Pay the Apex Linen bill using Pay Bills, dated Oct 14, and match it to the $95.00 bank feed line.
5. Record Jamie's $175.00 payment to Contract Labor, categorized correctly (as a direct expense, since no bill was entered for a same-day payment).
6. Run the A/P Aging Summary as of October 31 and confirm it ties to the Balance Sheet Accounts Payable line.
7. Identify the overdue item (the Sunset Cleaning Supply bill) and write a one-sentence flag for Dana.
8. Run a cash flow check for the first week of November: assume the bank balance is $1,150.00, GreenGuard's $300.00 net bill (after the credit) is due Nov 2, and Northside Dental's $900.00 invoice (from Module 5) is expected around the same time. Decide whether Bright Path can comfortably cover GreenGuard without relying on the Northside payment arriving on time.
9. Write a short summary to Dana (5 to 8 sentences): total A/P outstanding, what's overdue, the GreenGuard credit, and your read on the cash flow situation heading into November.

Deliverables

Screenshots of the vendor list showing the three new vendors, the three bills, the vendor credit, the Apex bill payment, the A/P Aging Summary, and the Balance Sheet A/P line; your overdue-item flag; your cash flow check; and the summary to Dana.

Self-Assessment Rubric

• Vendor and bill setup: Excellent means all three vendors correctly named, bills dated and termed accurately, and Jamie correctly marked for 1099. Needs work means missing terms, wrong dates, or 1099 tracking skipped.
• Vendor credit: Excellent means the $40.00 credit is entered against GreenGuard and ready to apply. Needs work means it was entered as a refund or a journal entry instead.
• Bill payment: Excellent means Apex was paid through Pay Bills and matched, not categorized as a new expense. Needs work means the payment was categorized directly, double-counting the cost.
• A/P Aging: Excellent means the aging total ties to the Balance Sheet and the overdue Sunset bill was correctly identified. Needs work means no tie-out was done.
• Cash flow judgment and communication: Excellent means a clear, numbers-based read on November that doesn't assume the Northside payment arrives on time, and a client summary that informs without overstepping. Needs work means a guess with no numbers behind it.

Stretch Challenge

Dana asks whether she should ask Sunset Cleaning Supply for extended terms given how often she orders from them. Write two or three sentences on what information you'd want to see before that conversation, and note that the final call is Dana's, not yours.

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Check Your Work

Finished the exercise? Compare your work against the answers below.