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August 29, 2024

Udeetta Sarma

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What are Bills Payable on a Balance Sheet?

For businesses, the terms and classifications of different elements in a balance sheet carry immense significance within finance & accounting. Some common key terms are that of "Bills Payable." In this article, I will discuss all bills payable for the Indian audience including the definition of bill Payable, function in the accounting system, Assets or liabilities!! How treated in final accounts and with examples on Format and Journal Entries.

What is Bills Payable?

At the basic level, bills payable is a term that refers to any type of financial document like a promissory note which serves as an acknowledgement from one firm for owing another party money and promise to pay it back at a specific time in future. It is a formal promise by the business to pay back money that it owes within an agreed-upon period.

This essence of Bills payable is widely used in the B2B business. When a business buys goods or services on credit and agrees to pay the debt by signing a bill of exchange, this is known as a discounts payable in accounting terms.

Bills Payable Example

Consider an example to get a better idea of the functioning of bills payable. For example, an electronics manufacturer in India XYZ Ltd. buys raw materials on credit from the supplier ABC Ltd. worth 5,00,000 INR After 90 days XYZ Ltd. agrees to make a payment and issue a promissory note in liability others (bill of exchange) on name ABC Ltd. This means that XYZ Ltd is legally bound to give ₹ 5,00,000 to ABC in 90 days. The ₹5,00,000 cash is the bills payable to XYZ Ltd in its books.

This very same amount will be recorded in the Books of ABC Ltd as "Bills Receivable" which suggests that they will get the payment after 90 days.

Bills Payable: Asset or Liability?

A common question among many is whether bills payables are an asset or liability. Bills payable, on the other hand being a liability in accounting is categorically classified as so. This is because a liability involves having to re-pay an amount of money or debt owed to another party.

This is reported as a current liability in the balance sheet since most bills payable are due no later than one year. When the requirement is more than 1 year, it can be regarded as a long-term liability.

This can be simplified by saying, “Asset: A company owns it or has a right to receive; Liability: It owes something” As these bills payable are what the company owes to others, it is recorded as a liability.

Bills Receivable: Debit or Credit?

We will now move on to the topic of bills payable, but here we seem a bit interested in a brief regarding revenue bills also and how it is accounted for. Bills receivable is money owed to the company for goods or services that will be paid on a future date. It is treated as an asset.

In accounting, when the company sends the bill (i.e. assigns to a sale made on credit), it is debited bills receivable. That's because debits increase assets The new bank would then credit the bills receivable account when it received payment, reducing its assets.

For instance, if a bill of ₹5,00,000 is drawn on XYZ Ltd. and in favour of ABC Ltd., then when the said bill reaches to ABC Ltd., will debit the bills receivable account noting that he has to receive ₹5,00,000 from XYZ Ltd.

Bills Payable in Final Accounts

Bills payable are very important in preparing final accounts. They appear in the current liabilities section of a balance sheet and can impact a company's bottom line.

If a company does not maintain their bills payable, since these are an actual financial obligation of the business it is quite feasible that they will quickly have cash flow troubles. Accurately recording and tracking bills that are due helps businesses keep an accurate set of financial statements, as well as be informed about the amount they owe to their vendors.

Bills payable are subtracted from the total assets of the company in final accounts to get the net worth or equity of a company. Also, bills should be paid with counter payments (bill payable to bill receivable) and thus both sides of the transaction accounted for.

Bills Payable Account Format

When it comes to the format of the bills payable account, it typically follows the standard accounting ledger format. Below is a simplified layout of how bills payable might appear in the ledger:

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
01/01/2024	Purchases Account			5,00,000
31/03/2024	Bank Account		5,00,000

Example – If XYZ Ltd. purchases raw materials on 1st January 2024 for ₹5,00,000 the entry would be made by crediting with bills payable account as in this case, the bill has received from the supplier. Hence, the amount is due to pay of Rs. Payment Date: 31st March 2024, Bank account debit and Bills Payable credit balance means the whole liability has been settled with it.

You might also be interested in Difference between Cash Flow and Fund Flow

Bills Payable Journal Entry

The recording of bills payable involves making the appropriate journal entries to reflect the creation and payment of the liability. Let's walk through the typical journal entries associated with bills payable:

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1. When the Bill is Accepted:

Journal Entry:

This entry records the purchase of goods and the issuance of the bill payable, acknowledging that the company owes the creditor ₹5,00,000.

2. When the Bill is Paid:

Journal Entry:

This entry recognizes the settlement of the bill payable. The liability account (bills payable) is debited, reducing the liability, and the bank account is credited, showing the outflow of cash.

Key Differences Between Bills Payable and Bills Receivable

Understanding the difference between bills payable and bills receivable is essential for managing finances:

Aspect	Bills Payable	Bills Receivable
Definition	A company’s obligation to pay a certain amount in the future.	An amount a company is due to receive from another party.
Balance Sheet Classification	Recorded as a liability.	Recorded as an asset.
Accounting Treatment	Credited when the bill is issued.	Debited when the bill is accepted by the debtor.
Cash Flow	Represents an outflow of resources in the future.	Represents a future inflow of cash or assets.
Nature	Involves payment to a creditor.	Involves receipt from a debtor.

While bills payable signify an outflow of resources in the future, bills receivable indicate a future inflow of cash or assets.

Conclusion

To conclude, Bills Payable is an important liability that businesses have to consider while managing their monetary resources. Therefore, it is important to understand the definition of bills payable and how they are recorded to have a clear picture of the financial status of any Company. This knowledge is crucial for businesses in India helping them remain compliant with the accounting standards, plan cash flow requirements and stay free of any financial burden due to multiple overdue payments.

When these bills payable are recorded properly in the balance sheet and final accounts, it will make sure that their financial dealings remain transparent to have a healthy fiscal position. It is as basic a principle of sound finance to adjust for statements receivable or payable when involving the transaction, either by issuing one or collecting on the other in their due course.

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FAQ

1. What are Bills Payable?

Bills payable are financial obligations, typically promissory notes, where a company promises to pay a creditor a specific amount on a future date.

2. Are Bills Payable an Asset or Liability?

Bills Payable are liabilities for the reason they represent money owed from a company to another party.

3. How are Bills Payable Recorded in Accounting?

It is credited when the bill comes due. When they are paid, the bills payable account that was created to receive them is debited and another (such as a bank) is credited.