What is bills payable, and how it’s crucial to your business 

As a business owner or a member of your accounting team, managing your business finances effectively is a top priority. One key aspect of this is understanding bills payable. While it may seem straightforward, handling bills payable properly can have a significant impact on your cash flow, vendor relationships, and overall financial health.  

In this article, you’ll learn exactly what bills payable are, see examples in action, explore how they’re recorded in your accounting system, and understand their role in your financial statements. 

What is bills payable?

Bills payable refers to the amount your business owes to creditors or suppliers. It appears as a liability on your company’s balance sheet and typically arises from a formal agreement, such as a promissory note. A bill payable is created when your company purchases goods or services and agrees to pay at a later date.  

Bills payable are a crucial part of your company’s short-term financial obligations.

They help manage expenses, allowing you to focus on growing your business without paying all costs upfront. This is particularly important for small business owners who need to carefully balance cash flow. 

Why does bills payable matter?

Bills payable are essential for keeping your business running smoothly. They provide the flexibility to make purchases even when immediate funds aren’t available, which is vital for businesses that rely on regular inventory replenishment or service payments. 

A bills payable example

Seeing bills payable in action is key to understanding how these liabilities work. 

For example, imagine your company needs to purchase $10,000 worth of inventory from a supplier. You don’t have the cash to pay for it immediately, so you agree to a 90-day payment term. As part of the agreement, your company issues a promissory note promising to pay the supplier in 90 days. 

Once the promissory note is signed, it becomes a bill payable for your business and a bill receivable for the supplier, as they are waiting to receive payment. This agreement ensures that you can immediately receive the inventory you need while managing your cash flow until the due date arrives. 

This simple yet powerful example demonstrates how bills payable function within a business’s financial framework. 

Bills payable account format

In your business accounting, bills payable are recorded to track how much you owe to creditors. Here’s a look at the account format: 

• Debit entry:. When your company receives inventory or services, a corresponding debit is recorded in the appropriate expense or asset account, depending on the nature of the purchase. 

• Credit entry. Your company also records a credit entry to the bills payable account to reflect the liability. 

Example of a journal entry

Date	Account	Debit	Credit
Jan 1, 2025	Inventory	10,000
Jan 1, 2025	Bills payable		10,000

In this example, the journal entry shows your company’s liability (bills payable) and the corresponding increase in inventory. The debit to Inventory reflects the acquisition of goods or services, while the credit to bills payable represents the amount owed to the supplier. 

Ledger posting

The ledger is where the bills payable account will reflect the amount owed. It will continue to carry the balance until the company makes the payment, at which point the balance in the bills payable account is reduced. 

Bills payable in trial balance

The trial balance is an important tool in accounting that makes sure your financial statements remain accurate. It lists all account balances, with bills payable appearing under the liabilities section.  

Wondering if bills payable is recorded as a debit or credit in trial balance? Since bills payable are considered a current liability, they are listed in the credit section of your trial balance. 

Example of trial balance

For example, imagine you’re managing a company that owes $10,000 in bills payable. The credit column reflects this liability, which will be adjusted once the payment is made. For this scenario, let’s say your company is a retail business that just received a shipment of inventory worth $10,000 and agreed to pay the supplier within 90 days.

The bills payable account represents the amount due to the supplier, and once the payment is made, the balance in bills payable will be reduced accordingly. 

Account	Debit	Credit
Cash	5,000
Inventory	10,000
Bills payable		10,000

Bills payable: Debit or credit?

The answer is simple: bills payable are always a credit. This is because they represent an amount that your company owes to its creditors. In accounting, liabilities are recorded as credits, while assets and expenses are recorded as debits. So, when a bill payable is created, it’s credited to reflect the money your company is obligated to pay in the future. 

Where are bills payable posted in financial statements?

Bills payable are listed on the balance sheet as part of your company’s current liabilities. With a snapshot of your business performance at a specific time, the balance sheet categorizes your business’s assets, liabilities, and equity, giving you a clear view of where your company stands financially.  

Since bills payable are short-term obligations, they fall under the “current liabilities section of the balance sheet. This helps business owners and accountants quickly assess what amounts need to be paid soon and how they might affect cash flow.  

Here’s an example of how bills payable might appear on your balance sheet: 

Assets	Amount	Liability and equity	Amount
Cash	$5,000	Bills payable (current)	$10,000
Inventory	$10,000	Owner’s equity	$5,000

In the example above, bills payable are shown under current liabilities, indicating that this $10,000 is due within the next year. This is important for you as a business owner because it helps you identify short-term obligations that could impact your cash flow.  

For instance, if you’re running a retail business and have $10,000 in bills payable due for inventory purchases, you need to plan your cash flow carefully to ensure you have the funds available to make this payment. 

By tracking bills payable on the balance sheet, you can effectively manage your company’s financial obligations and avoid surprises that could disrupt your operations. 

Difference between accounts payable and bills payable

Are you confused about the difference between accounts payable and bills payable? While they both fall under the same category, there’s a key distinction: 

• Accounts payable is a broad term that refers to all amounts a business owes to creditors for goods or services purchased on credit. This includes bills payable as well as other outstanding debts. 

• Bills payable, on the other hand, are a specific type of accounts payable. They refer to formal agreements, usually in the form of promissory notes, where the business agrees to pay at a later date. 

In short, while all bills payable are accounts payable, not all accounts payable are bills payable. Accounts payable also include other types of liabilities that aren’t formalized by promissory notes. 

Final thoughts

By understanding bills payable, how they are recorded in your accounting system, and their role in your financial statements, you can better manage your cash flow, ensure timely payments, and maintain strong relationships with your suppliers.  

Ready to take the next step in improving your financial processes? To simplify and streamline your bills payable operations, consider exploring accounts payable software. This will help automate the tracking of bills payable and keep your financial records organized at all times.