When you buy something on credit, the pending bill remains an outstanding liability for you. This is equally applicable in personal as well as business finances. Bills payable refer to these pending bills that you need to pay for services and goods received on credit. Many times it can involve short term loans from financial institutions and banks. It doesn’t matter if it’s personal or business finances, when you keep a track of your expenses properly, you can create a plan of action accordingly, mitigating risks. That’s when the bills payable come into the picture. Hence, you need to manage these very carefully, if you need accurate financial statements. In this blog, we will uncover the definition of bills payable, its features, and how bills payable are reflected in your financial statements.
Understanding Balance Sheets
While talking about the worth of any business, its financial projection plays a lead role. The tool that all businesses use to get an annual projection of their financial position is a balance sheet. This sheet is an integral accounting document that calculates the differences between the assets and liabilities, showing which has more weightage.
Here are a few reasons why balance sheets are really important for companies:
| Importance of balance sheet | Detail |
| Assessing Financial Picture | A balance sheet clearly shows the comparison between your total assets and liabilities. |
| Internal Decision Making | By analysing the calculations of your balance sheet, you can easily take certain important decisions like proper resource allocation. |
| Access to Funding | A balance sheet that shows your accurate financial position will also attract investors, whether you’re looking for VCs or angel investors. |
| Analysing Performance | When you’re keeping the balance sheets from over the years for records, you can compare the data. This will help you analyse your business’s performance. |
What are Bills Payable in Balance Sheets?
A typical balance sheet will have two sides, one for calculating the assets and other for liabilities. Bills Payable are a keen part of the liabilities section of your balance sheet. The bills payable include information about all the money you are yet to pay for short term loans, or for the credited goods and services. How you manage your bills payable around the year can have a significant impact on your balance sheet. When you know exactly when your short term liability payments are due, you can manage your cash flow accordingly. Resultantly, with timely payments you can also improve your vendor relations.
Example of Bills Payable
For example, if Company ABC pvt ltd gets a consignment of raw materials on 30th June 2023. However, the bill shall be payable after September. This is now a part of the bills payable in the liabilities section of your Balance Sheet.
Essential Features of Bills Payable
Here are some of the most essential features of the bills payable to help you identify them easily.
Representation of Short Term Debt
When you buy something but are yet to pay its price, that forms a liability on you. Same goes for your business. If you have brought raw materials, and its bill is payable at a future date, it forms a short term debt. So, all bills payable of your business collectively represent your short term debt.
Formal Record of Credit Purchases
Credit purchases refer to the purchases where you receive the goods and services before making the payment. So, documenting all your bills payable and keeping them as records can help you in moving your cash more freely. It will help in making informed decisions through which you can grow your business.
Method for Tracking
Bills payable become a method for tracking all short term payments you are yet to make, like employee salaries, utility bills, and vendor bills. By maintaining these records, you can easily track your expenses.
Impact on Financial Statement
The bills payable are a vital part of the liabilities section of your balance sheet.
Managing Cash Flow
When you know the dates on which payments are due, you can move the cash of your business freely and strategize the cash flow accordingly.
Importance of Bills Payable in Business
As a part of current liabilities in the balance sheet of your business, bills payable play a crucial role. The following points show the importance of bills payable in business.
Managing your Finances
When you have the record of your outstanding payments, you can manage your financial obligations more efficiently. As a result, you can always keep cash at hand to mitigate business risks.
Creditworthiness
When you’re habitual of settling unpaid bills in a timely manner, your business’s creditworthiness increases. Resultantly, you get access to instant loans at a low interest rate and higher chances of securing funding.
Eliminating Penalties
With all your bills cleared, there are no chances of you getting any penalties or interest charges from vendors. So, you can eliminate all additional costs and maintain a good rapport with your vendors.
Supplier Relations
When your bills payable are streamlined and you are consistent with your payments, it will build a good relationship with your supplier. Sometimes, early payments can also open new pathways to getting discounts.
Legal Compliance
Bills payable incur only after you have entered into a binding agreement with your vendors. So, completing these bill payments in a timely manner helps you fulfil your legal obligation.
Effect on Balance Sheet
Represented as current liabilities on the balance sheet of your company, it allows stakeholders to evaluate short term obligations.
Recording Bills Payable in the Balance Sheet?
Balance sheet of a company is typically divided into three parts: Assets, Liabilities, and Shareholders’ Equity. Before moving forward with understanding how you can record bills payable in the balance sheet, let’s see what these three parts include:
| Composition of Balance Sheet | Inclusions |
| Assets | Current Assets: includes properties that can easily be converted into cash such as furniture, short term securities, etc.
Long term Assets: these are usually intangible assets, which can not be converted into cash easily, such as goodwill. They have a more intricate value addition to your business than just monetary value. |
| Liabilities | Current Liabilities: usually includes the short term liabilities of a business such as its accounts payables.
Long term liabilities: refers to the long term debts of a business. Examples include mortgages and long term loans. |
| Shareholders Equity | This section allows the entrepreneurs to see their claim in the business. It shows the: Capital Contribution: each shareholder or partner’s contributions are displayed in this section. Earning on Capital: Based on the statement and contributions, the owner can also look at their earnings on capital contributed. |
How to Record Bills Payable in the Balance Sheet?
As you can see, there is no separate entry for bills payable in the balance sheet. However, all different types of bills payable are reflected on the liabilities side under “current liabilities”. These can include the following:
- Short term loans;
- Bills of vendors;
- Accounts payable for services received;
- Salaries of employees, etc.
Then how exactly is the bills payable treated in your company’s financial statement? Let’s see:
Review and Approve the Bill
Once you receive a bill from a vendor for services or products bought on credit, you need to review the details and approve it for further processing.
Journal Entry in Ledger
Once the bill is approved and goes to accounting, the bills payable will be included in the part of Accounts payable, which refers to the current liabilities of the business.
Double Entry in Profit and Loss Account
While representing bills payable in the profit and loss account, the accounts payable are credited with the amount to be paid and the goods and services received are shown in debit for an equivalent amount.
In the Balance Sheet
As discussed earlier, in the balance sheet, the bills payable are in the liabilities section as represented as a current liability.
For example,
If your company receives a bill of Rs. 50,000/- for office supplies, this is how it will be treated in the financial statements:
Double Entry Bookkeeping
Accounts payable will be credited for Rs. 50,000 and office supply expense will be debited for Rs. 50,000. –
Balance Sheet
The total of accounts payable balance will be shown as a current liability amount.
How to Identify Bills Payable?
For all outstanding liabilities where bills of exchange are issued and accepted, the bills payable come into the picture. But, how exactly can you identify a bill as a bill payable? Let’s see some instances to help you identify bills payable from other accounts payable.
| Type of Bills Payable | Tips to Identify |
| Supplier Invoices | Invoices that you receive from suppliers for credit purchases are bills payable. Supplier invoices usually include the amount owed, due date and other details. |
| Purchase Terms | Checking out the terms of purchase of the different goods and services you have taken is also a mode of identifying the bills payable. |
| Accounts Payable | You can identify other bills payable like salaries by reviewing your accounts payable in the ledger. This is a direct method that will provide you accumulated data of all outstanding payments. |
Key Metrics Related to Bills Payable
Identifying and managing the bills payable in your personal and business life can help you improve the cash flow and performance of your business. Here are the most important metrics related to bills payable that you must be aware of:
Invoices Received and Processed
To manage your finances properly, you need to be fully aware of the expenses your business is incurring. So, when you keep a track of the number of invoices you receive and process monthly, you can make improvements in your invoice management easily.
Calculate Cost and Time per Invoice
Simply put, it refers to the cost you incur to process an invoice. Moreover, also figure out the average time you spend processing an invoice. Knowing this, you can take certain steps to make the processing more efficient.
Electronic vs. Physical Invoices
E-invoices are faster to process. Moreover, using invoice management software like the CaptainBiz billing software can help you minimise errors in processing your bills.
The Key Difference in concept of Bills Payable vs Accounts Payable
With a broader perspective, the terms bills payable and accounts payable seem similar. Often on, people even use the terms bills payable and accounts payable interchangeably. However, there’s a slight difference in both. Accounts payable involves a broad range of your business outstanding liabilities. Whereas, bills payable are only acceptable if there’s been a formal agreement from the parties. This formal agreement can be either in the form of a promissory note or bill of exchange.
Conclusion
To conclude, even though not explicitly defined in the balance sheet, bills payable play a very crucial role in your financial statement. Managing the bills you are yet to pay for the services received already received is vital to ensure smooth operations and cash flow.
FAQs
-
What is the purpose of bills payable?
Bills payable serve the purpose of showing you the outstanding liabilities for purchases made on credit.
-
Is bills payable an asset?
No, bills payable is not an asset. It forms the part of short term liabilities of your business.
-
What is the entry for Bills payable?
The entry of bills payable is that it is accounted under the section of accounts payable which is credited and the expense of equivalent amount is debited.
