How to Manage Accounts Payable in Xero Accounting Software

Accounts payable is a balance sheet account that represents the amount a business owes to its suppliers for received and invoiced goods and services purchased on credit terms. The accounts payable process is a series of workflow steps for supplier invoice processing that includes verification, 3-way matching, approval, and payment. 

Xero accounting software uses standard workflows related to accounts payable, as detailed in our step-by-step article. 

Why is Accounts Payable Important?

For growing businesses, the traditional AP workflow in Xero can become a bottleneck. Manual steps and disconnected systems often lead to delays, missed opportunities, and supplier dissatisfaction.

Accounts payable is important because AP processes ensure that:

• Invoices are well-managed, verified, and approved to avoid overpayments
• Timely payments are made to suppliers for good supplier relationships and continued shipments from the vendor
• Early payment discounts are taken to save money 
• Cash flow is forecast and optimized for better cash flow management
• Spending is controlled through improved visibility and analysis

Properly structuring an accounts payable department and using accounts payable automation software with Xero ERP integration improves results and strengthens internal controls. 

How do Accounts Payable Work in Xero?

In Xero accounting software, the accounts payable department manually enters invoices (using steps in the Bills to Pay menu within the accounts payable software). Invoices are tracked and paid after manual invoice matching with the PO and GRN, verification, and an invoice approval process. Xero is used by small businesses in many industries. 

Businesses receive supplier invoices from their procurement process to pay for goods or services with payment terms. From the supplier’s perspective, these are the customer invoices included in their accounts receivable aging for tracking, management, and AR collection. Subscriptions also flow through accounts payable. 

Manual data entry and invoice processing in Xero accounts payable is time-consuming unless add-on AP automation software is used with Xero integration. 

AP Managers and Controllers often find these manual tasks time-consuming, especially with 100+ invoices per month. This creates risks of late payments, approval bottlenecks, and compliance issues.

The following sections describe menu steps for different processes in the Xero workflow for accounts payable when using standalone Xero accounting software.  

Xero Accounts Payable Workflow Summary

• Receive Supplier Invoice
  
  • Supplier sends invoice for goods/services
• Enter Supplier Bill into Xero
  
  • Manually input details or use “Email to Bills” feature
• Verify & Approve Invoice
  
  • Match PO, check accuracy, and route for approval
• Record & Schedule Payment
  
  • Mark bill as paid or partially paid; schedule batch payments
• Pay Supplier
  
  • Export payment file and initiate bank transfer
• Reconcile Payments
  
  • Match payment records in Xero with bank data
• Report & Analyze
  
  • Run reports and view dashboards for cash flow, liabilities, and AP metrics

Xero Workflow #1: Record Bill or Invoice Payments

Record bill payments in Xero online accounting software or its mobile app for Android or iOS devices if you have role approval in Xero. If this is a full bill payment, the bill moves to the Paid Tab. 

If it’s a partial payment or overpayment, the bill remains in the Awaiting Payments tab. The payment transaction for recurring billing only affects one current transaction. Remove any erroneous overpayment applied to a bill in the Xero web. 

Steps in Xero for recording a bill payment are:

1. Business menu > Bills to pay > Awaiting payments tab
2. Open the bill being paid to record the payment 
3. Scroll to the Make a payment box on that bill page
4. Enter payment information in the payment field data boxes, including:
   1. Amount Paid
   2. Date Paid (dropdown menu)
   3. Paid From (dropdown menu)
   4. Reference
5. Optionally add a note to the transaction (as history, without editing functionality):
   1. Click Add note
   2. Type note
   3. Click Save
6. Click Add payment

Note that Xero Central Support shows different steps for Invoice payment by clients of accountants and bookkeepers who are using Xero Practice Manager. 

Xero Workflow #2: Manage Suppliers

Add, edit, archive, and restore suppliers in Xero through the Contacts Menu used to manage Suppliers. 

Add a Supplier

Although you can import suppliers into Xero, we list the steps for manually adding a supplier in Xero.

Steps to add a supplier in Xero are:

1. >Contacts menu
2. >Suppliers > New contact
3. Enter the Contact Information fields data.
   1. Contact Name equals how the payment (like a check) should read
   2. Account Number
   3. Primary Person (First Name) (Last Name)
   4. Email
   5. Phone
   6. Fax
   7. Mobile 
   8. Direct Dial
   9. Website
   10. Postal Address (remittance address)
   11. Street Address (physical location)
4. Enter only the supplier-related Financial Details fields data
   1. Purchase Settings (dropdown menu – select an option)
      1. Tax-inclusive (sales tax included in Unit Price line items)
      2. Tax exclusive (shows tax separately on purchase orders and bills created for suppliers)
      3. No tax (if not required to pay sales tax) 
   2. Default account (leave blank unless the account is always the same for the supplier)
   3. Default Region (dropdown menu to track the region)
5. Tax (dropdown menu to choose from the following choices + Enter the Tax ID number in the correct format from their W-9 (or W-8 series) IRS form that you have collected
   1. EIN 
   2. SSN
   3. ITIN
   4. ATIN
6. Default sales tax (dropdown menu)
7. Tax on Purchases (%) – leave blank if the default sales tax rate applies or enter a percentage rate if the default sales tax is not selected
8. Batch payments (enter the supplier’s payment details if batches are used for payments)
   1. Bank routing and account number (together as one number)
   2. Bank name
   3. Type of supplier bank account (Business checking, etc.)
9. Bills Due Date:  Enter a number of days + dropdown menu choices, as follows:
   1. of the following month
   2. day(s) after the bill date
   3. day(s) after the end of the billing month
   4. of the current month
10. Invoices Due Date (steps are the same as Bills Due Date)
11. Xero Network Key:  Click the link for instructions to send an invitation to the supplier/then Save (use this field only if the supplier is also a Xero user with a Xero Network key)
    1. Suppliers can send bills through Xero
    2. Your business can pay suppliers through Xero

Edit a Supplier

1. Go to the Contacts screen
2. Click on a Supplier’s Name to select
3. >Edit button
4. Make any desired changes in the Contact Information or Financial Details section of the screen that appears
5. >Save 

Archive and Restore a Supplier

When you no longer do business with a supplier, archive the supplier to view existing contact details and transactions. You can’t add new transactions once a supplier is archived. Xero doesn’t let you delete a supplier. If you begin using the supplier again, you can restore the supplier from the Archive. 

Archive a Supplier

The steps to archive a supplier are as follows:

1. Go to the Contacts screen>All contacts
2. Check the box before a supplier’s contact name if you want to archive it
3. > Options button
4. >Archive from the dropdown menu > Archive button in the popup menu to confirm Archive Contacts for the supplier
5. The first time that you Archive a Customer in a new Category on the left menu is Archived (with the number of archived contacts); the number changes for any additional Archive activity

Restore a Supplier

Steps to Restore an Archived supplier are:

1. Go to the Contacts screen
2. Click on the left menu, Archived category
3. Click on the Archived supplier’s name
4. Click the Restore button
5. Click on the Restore button to confirm Restore (the supplier) in the popup menu.

Xero Workflow #3: Submit, Reimburse, and Manage Employee Expenses

Xero Expenses is an additional module (Suite) from Xero. 

The steps for employee expense reimbursement are as follows:

1. Go to the Xero Me mobile app
2. Snap a photo of the receipt or record mileage for reimbursement, or upload an image
3. The Xero Me app automatically pulls the data into a claim
4. Approvers are notified of the claim electronically to approve or decline with a button
5. Approved expenses are paid
6. You can tag expenses by type
7. Review dashboards of real-time expenses to manage spending

Xero Workflow #4: Enter Supplier Bills

The steps to enter supplier bills in Xero accounting software are as follows:

1. >Business>Purchases overview
   1. Summarizes total payable bills in columns by status: 
   2. Draft, Awaiting Approval, Awaiting Payment, Overdue
   3. View purchase orders
   4. View the bar graph of expected payments by due dates
   5. Use Search to find bills or purchase orders entered in Xero
   6. + New button for New Bill
2. From: Enter supplier name or choose supplier name from Xero
3. Date: Today’s date as default, or change the date
4. Due Date: Use the calendar for the supplier invoice due or Xero shortcuts from Xero Central  to enter the Due Date
5. Reference: Enter the bill or invoice number
6. Item: Select from your saved products or services list (automatically populating line item fields) or key in and select an account from your chart of accounts, then enter to complete each line item field, including Qty and Unit Price
7. Click a button to add a new line on the supplier invoice
8. Click a button to assign expenses to a customer
9. Choose Tax Exclusive if sales tax is not included in Unit Price, Tax Inclusive if tax is included in Unit Price or No tax if tax exempt
10. Compare your Xero supplier Bill total to the supplier’s actual bill total for accuracy (Bill Total should be the same)
11. When accounts are coded and a supplier invoice is approved, your financial reports are updated in real-time
12. Approvers with role authorization can Approve with a button in this New Bill screen or Submit for Approval if not authorized to approve
13. Click the Paper icon to upload and attach the actual bill from the supplier 
14. Or use the Email to Bills feature in Xero instead
    1. > Business
    2. > Bills to pay
    3. > Create a bill from email
       1. Click your business’s unique Xero email address shown to copy it to a clipboard.
       2. Go to your business email account.
       3. Forward the email with a PDF-formatted bill to that unique Xero email address
       4. Bill appears as a Draft, is viewable, and shows as attached in the Xero Paper icon on the Bills to Pay screen

Xero Workflow #5: Pay Bills from Suppliers or Vendors

Steps to pay suppliers or vendors in Xero accounting software are:

1. > Business > Bills to pay > Awaiting payments
2. > Click the Schedule Payments button and > Click the Schedule of planned payment link for a date shown to view all scheduled invoices for the date
3. > Click the top checkbox by Ref to schedule all payments for a date shown, or check individual invoices to include in a batch payment
4. > Click the Batch Payment button and confirm with the OK button in the pop-up screen to reach the New Batch Payment Screen
5. Be sure the supplier’s bank account data has been saved in the Contacts section for these suppliers
6. > Click the Make Payments button to record the transaction in Xero
7. > Click the Export Batch File button to download the file to your computer
8. Log in to your bank account and import the file to initiate payments to the suppliers (which includes the needed information)
9. Xero also includes a link for how to email remittance advice to each supplier in the New Batch Payments screen

Xero + Mass Payments Software 

You can combine Xero with third-party add-on Mass Payments software. Tipalti mass payments software lets you pay partners, independent contractors, and suppliers in 200 countries and 120 currencies. Choose from multiple payment methods allowable in the payment recipient’s country. 

Tipalti offers 50+ payment methods, including:

1. ACH (U.S. domestic only)
2. Global ACH
3. PayPal
4. Wire transfer
5. Paper check

Besides integrating with accounting software and ERP systems, Tipalti also integrates with some performance marketing software platforms that measure the payment amounts due to certain types of partners. 

Streamlining Workflows with Xero + AP Automation

AP automation with Xero streamlines workflows for invoice processing using best practices. Invoice processing covers workflows between receiving and paying the supplier invoice after approval. Tipalti AP automation includes 3-way or 2-way invoice matching with the purchase order and receiving documents data, and a guided approvals workflow. 

With the integration of AP automation, your business will maximize its investment in Xero accounting software through a combined accounting system. Integrate AP automation software with Xero to eliminate the manual data entry that the detailed Xero workflow steps described in this article require. Your business will eliminate 80% of the end-to-end payables process workflow, gaining efficiency and reducing hiring needs. 

Tipalti provides a self-service supplier onboarding portal to gather tax forms data, contact information, preferred payment methods and information. Suppliers can upload electronic invoices into the portal, email digital invoices, or use OCR scanning in Tipalti to capture headings and line item data. Your suppliers receive payment status notifications through the supplier portal and by email. 

Tipalti reconciles large payment batches with multiple payment methods in real-time, speeding your accounting close by 25%. 

For Xero accounts payable automation, you can also choose to integrate a third-party Expense automation software product instead of using the Xero Expense suite for employee expense management and reimbursement. 

Handling Fraud Prevention with Xero + AP Automation

Using the best AP automation software with Xero integration gives you additional fraud risk reduction benefits. Tipalti AP automation validates suppliers, matches their TIN numbers to an official database, and screens payments using over 26,000 business rules to trigger exceptions for possible fraud or errors requiring investigation. 

Automatic Accounting Journal Entries for Accounts Payable in Xero 

Xero alone generates some automatic and repeating journal entries. With AP automation software integrated with Xero, your business can automate journal entries in real time for transactions generated by the add-on software. The fields are mapped between the software programs to sync data for business accounting. 

Reports and Dashboards with Xero and Add-on AP Automation Software

Add-on AP automation software gives you additional reports and real-time analytical dashboards. For example, Tipalti AP automation tracks supplier payments and provides 1099 and 1042-S tax preparation reports to simplify filing IRS and applicable state information returns. You can also choose the option to subscribe to Tipalti-partnered SaaS software from Zenwork called Tax1099 for automated eFiling of 1099-MISC and 1099-NEC forms and distribution to recipients. This integration imports 12 months of Tipalti payments data from the calendar year. 

Before making payments, you’ll see cash flow requirements for paying large batches as part of your payment processes. Tipalti also provides the AP turnover ratio and other statistical trends and metrics for managing payables. 

Frequently Asked Questions (FAQ)

Summarizing Accounts Payable in Xero

Xero provides basic accounts payable, requiring many manual steps for its detailed workflows. Your business should consider automating and improving Xero accounts payables functionality with Tipalti’s third-party add-on software for more workflow reliability and efficiency. When you complete invoice processing efficiently, you’ll be able to increase profitability by taking early payment discounts on time per invoice payment terms.