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Meaning of Bills Payable
Bills Payable (B/P) is a liability document which shows the indebtedness of an individual, an organization, etc. When an individual or an organization makes a credit purchase of any goods or avails service. Generally, in a transaction of sale and purchase of goods, during the credit term, seller of goods need money. So, it will draw a bill to purchaser of goods. Purchaser of goods will accept the bill and returns to seller of goods. This becomes Bills Receivable for drawer of bill / seller of goods and Bills Payable for drawee of bill / purchaser of goods.
Bills Payable Journal Entry
The books of accounts are prepared following double entry accounting system. The journal entry when goods or services are purchased on credit is:
Particulars Debit Credit
Journal Entry (1)
To Creditors ****
Journal Entry (2)
To Bills Payable ****
The B/P will reflect as a liability in the balance sheet under the head Current Liabilities.
The journal entry for bill payable when the supplier makes payment:
Particulars Debit Credit
Bills Payable ****
To Cash or Bank ****
The amount paid will reduce from the B/P head in the balance sheet.
Bills Payable vs. Accounts Payable
Often people use these terms interchangeably. Both represent a monetary obligation to pay to an outside party. In spite of being similar, there is one difference which separates the two. Accounts payable reflect amount outstanding for credit purchase of goods while Bills Payable indicate amount of Bills Payable i.e. value of biils accepted by the company. Bills Payable is covered under Negotiable Instrument Act and payment to be made to creditors is covered under general contract act.
Bills Payable and Bills Receivables
Bills Receivable and payable are exactly opposite of each other. Former is the asset of the company. Like B/P, it is also a negotiable instrument with the evidence of debt that is payable to the holder. If a company has provided credit sales or services to anyone, then it will write a bill on the debtor of amount that is payable in the future. Such bill is termed as bills receivable.
These bills appear on the asset side of the balance sheet. On the other hand, bills receivables are drawn when a vendor or seller makes any credit sale to the business. The amount mentioned in the bill is paid on a future date and such bill is called bills payable.
It forms an important aspect of accountancy that falls under short term liabilities. On the basis of such bills, the company determines its creditors (i.e. payments for goods done on a certain future date). Bills receivable helps the seller to get funds by discounting of bill and purchaser of goods will also get credit. Practically it is very useful source of finance. 1–4