Payments to suppliers - BACS, cheque, card, and cash payment...

Learning Outcomes

After reading this article, you will be able to explain and distinguish the main business methods of paying suppliers—BACS, cheque, card, and cash. You will understand the procedures for authorising these payments, identify supporting documentation, and apply ACCA exam-level knowledge to accurately record and control supplier payments.

ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand both the practical and control aspects of supplier payments. In particular, this article covers:

• The key types of payments to suppliers: BACS, cheque, card, and cash
• Authorisation processes for business payments
• Security and control procedures to safeguard payments
• The documentation required for supplier payments
• Recording supplier payments in the accounting system

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which payment method allows a business to transfer funds directly to a supplier’s bank account electronically?
   1. Cash
   2. BACS
   3. Cheque
   4. Credit card
2. Who must authorise a cheque for payment to a supplier in most businesses before it is sent?
   1. Any employee
   2. Sales staff
   3. An authorised signatory
   4. The bank
3. What is the main security risk associated with cash payments to suppliers?
   1. Data entry errors
   2. Loss or theft
   3. Account misclassification
   4. Incorrect supplier name

4. Briefly explain why supporting documentation is important for supplier payments.

Introduction

Every business needs to pay suppliers for goods and services. Choosing the correct method—whether BACS, cheque, card, or cash—depends on value, frequency, and security considerations. Understanding the procedures for authorising these payments and the supporting documentation is essential for maintaining control, ensuring accurate recording, and minimising risk. This article explains the main supplier payment methods, their key features, security measures, and recording requirements, as expected in the ACCA FA1 exam.

PAYMENT METHODS TO SUPPLIERS

Supplier payments can be made in various ways. Each method has different procedures, controls, and documentation.

BACS Payments

BACS (Bankers Automated Clearing Services) is an electronic system used to transfer funds directly between bank accounts. Most regular or high-value payments are now made by BACS due to speed and security.

Key Term: BACS payment
An automated transfer of funds between bank accounts, often used for salaries or regular supplier payments.

Cheque Payments

Businesses may pay suppliers by cheque, a written instruction to the bank to pay a specified sum from the business’s account.

Key Term: cheque
A written document instructing a bank to pay a specific amount from a business's account to the named payee.

Most cheques require the signature of an authorised employee. Cheques are less common due to slower processing and increased risk of error or loss.

Card Payments

Businesses also pay suppliers using debit or credit cards, especially for immediate or online transactions. Card payments are suitable for smaller purchases and provide quick payment confirmation.

Key Term: card payment
A payment made using a debit or credit card, transferring funds immediately or on credit to the supplier.

Card payments typically require authorisation controls and leave a traceable electronic record.

Cash Payments

Cash (notes and coins) is typically reserved for small expenses or suppliers who do not accept other forms of payment. Cash payments are less secure and must be recorded meticulously.

Key Term: cash payment
Immediate settlement of a purchase using notes or coins.

Most businesses minimise cash payments to reduce the risks of loss or theft.

AUTHORISATION AND CONTROL OF PAYMENTS

Before payments to suppliers are made, they must be properly authorised. The level of authorisation required usually depends on the payment method and amount.

Authorisation Procedures

Payments are not made until supporting documentation, such as invoices and delivery notes, have been checked and approved.

Key Term: authorisation
Confirmation from an appropriate person that a payment is approved and can be processed.

• BACS payments: Set up and released by authorised staff, often with dual authorisation for higher amounts.
• Cheque payments: Must be signed by one or more designated signatories, depending on business policy and value.
• Card payments: Require cardholder authorisation and may be limited to specific staff.
• Cash payments: Require immediate confirmation, often overseen by a senior employee or petty cashier.

Security and Controls

Strong controls help prevent errors and fraudulent payments:

• Segregation of duties (preparation, authorisation, recording)
• Secure storage of chequebooks, cash, and card details
• Computerised systems for BACS and card payments, with password protection and access restrictions
• Daily reconciliation of cash and completed payment documentation

Key Term: designated signatory
A person formally authorised to approve and sign payments on behalf of the business.

PAYMENT DOCUMENTATION

Each payment method requires different documentation for tracking and recording.

• BACS payments: BACS payment request or summary, listing supplier details, account numbers, and payment amounts.
• Cheque payments: Cheque requisition form, original invoice, authorisation signature(s), and cheque counterfoil.
• Card payments: Point-of-sale receipts, card summary report, and supporting invoices.
• Cash payments: Receipt from the supplier and petty cash voucher with authorisation.

All documents should be matched with the supplier invoice and, where relevant, the delivery note before payment is approved.

RECORDING SUPPLIER PAYMENTS IN THE ACCOUNTS

Payment transactions must be entered promptly and accurately in the accounting records. The cash at bank account is credited when a payment is made, and the liability to the supplier (payables) is debited, reducing the amount owed.

Worked Example 1.1

A business pays Supplier A $1,000 by BACS for goods previously purchased on credit. What are the correct accounting entries?

Answer:

• Debit Payables (Supplier A) $1,000 – reducing the amount owed
• Credit Cash at Bank $1,000 – reflecting the outflow of funds

Worked Example 1.2

A cheque for $400 is drawn and signed by two directors to pay Supplier B. After payment, what documentation should be retained?

Answer:

• The signed cheque counterfoil
• The paid invoice
• Authorisation records (cheque requisition form)
• Any delivery notes supporting the purchase

Exam Warning

Be careful to match payment documentation to the correct payment method. Failing to retain authorisation or supporting evidence for a payment may cause problems during audits or with internal controls.

Summary

Supplier payments can be made by BACS, cheque, card, or cash, each requiring specific authorisation and documentation. Strict security and clear record-keeping help ensure only valid, approved payments are made. Proper accounting entries reduce payables and cash at bank balances. Understanding these processes is essential for exam success.

Key Point Checklist

This article has covered the following key knowledge points:

• Identify the main forms of supplier payment: BACS, cheque, card, and cash
• Explain the authorisation requirements and security controls for each method
• List and describe essential supporting documentation for supplier payments
• Apply correct accounting entries for payments made to suppliers
• Understand the risks and control measures for payment security

Key Terms and Concepts

• BACS payment
• cheque
• card payment
• cash payment
• authorisation
• designated signatory