Bills Payable in Balance Sheet: Definition and Meaning

Bills payable are business records representing the amount owed for products and services bought on credit. Phone bills, service invoices and utility bills are examples of bills payable. Small firms that use the accrual method of accounting must correctly record their business debts. In the general ledger, companies track their short-term debts, including the amount owed for bills payment as accounts payable. Bills payable are actual bills of sale that ask for payment by a specific date. Let us learn about bills payable definition in detail.

Did you know? Accounts payable is a category in the general ledger (GL) that records current liabilities. Bills payable refers to the actual invoices that vendors send you as a request for payment.

What are Bills Payable?

A person's or a business's financial obligation is referred to as bills payable. The term is applied in finance and accounting.

Bills payable are short-term notes issued by a company that must be paid on demand or by a particular date. The duration of such types of debt is usually fairly brief.

Bills payable are sometimes confused with accounts payable, which are invoices from suppliers that are received and recorded by a firm in the current liabilities section of the balance sheet. If an obligation exists at the conclusion of a reporting period but no invoice from a supplier has been received, it may be recognised as an accrued liability. The credit amount in accounts payable is a current obligation on the company's balance sheet.

Also read: What is Accounts Receivables - Meaning, Scope And Examples of Accounts Receivable

Accounts Payable Vs. Bills Payable 

1. Accounts payable and bills payable are not the same. Bills payable refers to the invoices suppliers send you as a request for payment; accounts payable is a general ledger account type that reflects current obligations. Bills payable are recorded as a credit entry in the accounts payable account.
2. Accounts payable tracks the short-term debt your company owes to its vendors for products and services. Each accounts payable entry, including bills due, is coupled with a payment period. A vendor invoice, for example, may state that payment is due within thirty days after the invoice date.
3. On a company's balance sheet, accounts payable is shown as a  current liability. They are obligations that a business must pay within one year of the balance sheet date.
4. Bills payable are the bills that you get from merchants or suppliers. The bill payable is when the supplier that sold you ₹5,000 in tools gives you a bill for the shipment. Your monthly payments for light, water, and other utilities are the same. Because invoices or bills typically accompany accounts payable transactions, it is normal to refer to bills payable and accounts payable interchangeably. On the other hand, accounts payable choose to split some of their invoices, such as putting utility bills in a distinct category of utilities payable. This is beneficial if, for example, the firm wishes to track its utility spending or segregate its other expenses from utility bills.
5. 

Is Bills Payable a Debit or Credit?

Bills payable in trial balance are recorded as a credit of the accounts payable category of a company's general ledger. Accounts payable will be lowered with a debit entry.

To enter a vendor invoice in accounts payable, follow these steps:

1. Check the bill payable to check it is correct.
2. If the invoice is correct, approve it.
3. Accounts payable should be credited.

Make a debit to a separate account, depending on how the bill payment is categorised. Typically, they fall within one of the below:

• Accounts such as maintenance, rent, or advertising expenses are examples of costs.
• Fixed assets include accounts such as vehicles, land, and equipment.
• Prepaid assets include accounts like prepaid insurance and prepaid bills.

Bills Payable and Bills Receivable

Bills Payable: It stands for a sum that a business owes in return for the provision of products or services. It is a debt that must be repaid. Liabilities for the company include bills that are due. Cash outflow is an outcome of bills payable resulting from credit purchases.

Bills Receivable: It is the sum expected as payment for products supplied or services rendered. It represents the amount owed. These are assets to a company. Cash inflow is a result of bills receivable. It results from credit sales.

Also read: Chart of Accounts Meaning - Chart of Accounts Example & Types of Chart of Accounts

Importance of Bills Payable

The bills payable account appears on a company's balance sheet, which shows the company's financial condition at a certain point. The actual owners' equity is assessed after liabilities are removed from assets; therefore, bills outstanding decrease the value of owners’ equity. Increased liabilities indicate that the company's equity has decreased. A credit in the bills payable account raises the amount of the company's responsibility to pay, whereas a debit in the bills payable account decreases the amount of the liability.

Interest Payable

If a firm obtains a loan, the loan may be categorised as a bill payable if it must be returned within one year. A loan which remains due for more than a year is often classed as notes payable, whereas short-term loans are classified as accounts or bills payable.  As a result of the short-term borrowing, the firm makes interest payments. The interest due is categorised as interest payable until the company makes a cash payment for the amount of interest due. Another short-term debt is interest payable, which implies that the corporation is required to pay interest.

Accounting for Accruals

Companies that employ accrual accounting record transactions as they occur, rather than when cash is collected or paid. Bills payable demonstrate the use of the accrual method of accounting since the company records the bill payable when the bill or payment is due rather than when the payment is made. 

Assume a company gets ₹10,000 in credit for items. In this case, the corporation must debit ₹ 10,000 in purchases and credit ₹ 10,000 in bills payable. It should be noted that credits and debits must balance. This transaction implies that the company purchased ₹ 10,000 of products on credit, but the merchandise was not paid for in cash.

Journal Entry for Bills Payable

The accounting books are created using the double-entry accounting system. Therefore, when goods or services are acquired on credit, the following journal entries are made:

The bills payable in the balance sheet will be recorded as a liability under the heading Current Liabilities. When the provider pays, the following journal entry is made:

Also read: What Are Real Accounts - Learn About Types of Real Account & Difference Between Real Personal and Nominal Account

Conclusion

Bills payable are an essential part of accounting that falls under the category of short-term liabilities. The company determines its creditors based on such bills (i.e., payments for goods done on a certain future date). Bills receivable lets the supplier collect funds by cashing the bill. 

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