Bills Payable

Meaning of Bills Payable

Bills Payable (B/P) is a liability document that 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, the seller of goods needs money. So, it will draw a bill to the purchaser of goods. The purchaser of goods will accept the bill and returns it to the seller of goods. This becomes Bills Receivable for the 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 the double-entry accounting system. The journal entry when goods or services are purchased on credit is:

ParticularsDebitCredit
Journal Entry (1)
Purchases****
To Creditors ****
Journal Entry (2)
Creditors****
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 DebitCredit
Bills Payable****
To Cash/Bank****
Bills Payable

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 that separates the two. Accounts payable reflect the amount outstanding for credit purchase of goods while Bills Payable indicate the amount of Bills Payable i.e. value of bills accepted by the company. Bills Payable is covered under the Negotiable Instrument Act and payment to be made to creditors is covered under the 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 evidence of a 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 the 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.

Conclusion

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 help the seller to get funds by discounting of bill and the purchaser of goods will also get credit. Practically it is a very useful source of finance.

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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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