Bills Payable

From CEOpedia | Management online

Bills payable this expression is used in the fields of finance and accountings. It is an elder definition, and is more widely met in the English system of accounting than the American system. Bills payable is liability document and it shows the indebtedness of organization or an individual. When an individual or an organization makes a purchase of any goods or services received on credit. Fundamentally, in a deal of sale and purchase of goods, seller of goods require money. Therefore, it will draw a bill to purchaser of goods. Purchaser of goods will embrace the bill and gives back to seller of goods. It is called Bills Receivable for seller of goods and Bills Payable for purchaser of goods (drawee of bill).

Bills payable in the context of banking can be alse defined as the funds that a bank borrows from other banks. These loanwords are backed by collateral consisting of the bank's note of hand and a pledge of government securities. These are usually due in the quite short term and are used to supply liquidity to the receiving bank.(S. Bragg, 2018)

Bills Payable on the Balance Sheet

In the balance sheet short term bills payable have terms one year and are categorised under current liabilities in the balance sheet. Long term bills payable are due within more than one year from the balance sheet date and are classified as long term liabilities in the balance sheet.

In the bills payable accounting procedure are three phases,

  • The business buys goods from a supplier and registers the liability as an accounts payable in the typical way.
  • The business embrances the bill of exchange and relocates the liability to a bills payable account.
  • The business makes the payment to the payee when the bill is featured on the date of maturity.

Diffrence between bills payable and accounts payable

Accounts payable is a category which belong to the category liabilitiesLiabilities are qoutas the company has to settle up to else parties. These qoutas normally appear while doing business. Therefore, accounts payable are qoutas that have to be settle up to else parties.(K, Haase, 2012) Bills payable pertains to the actual bill you receive from sellers or suppliers. For instance, when the supplier sends a bill for the shipment, that invoice is the bill payable. As well as monthly bills for light, water and other utilities. As accounts payable dealings commonly come with invoices or bills, it is usual to pertain to bills payable and accounts payable as if they were like the same thing. Companies like better to separate some of bills, for example locating utility bills in a different rubric of utilities payable. This is useful if the company wants to supervise its utility spending or contemplate its other costs apart from utility bills (F. Sherman, 2018)

Drawing up the Balance Sheet

Different disparity among bills payable and accounts payable is that bills payable is not an entrance on financial statements. The debt presented by the invoices goes on the books as accounts payable. Regiter it in the "liabilities" sector of the balance sheet together with notes payable. The balance sheet is an equalization; the assets on one side must be always identical as the total liabilities plus the owners' equity. Every accounting entry with "payable" in the name is a liability. That can contain wages payable, salaries payable, interest payable and income tax payable.(F. Sherman, 2018)

Examples of Bills Payable

  • Invoices or notes payable: Invoices or notes payable are debts that an individual or a company has agreed to pay, usually to a vendor or service provider. These notes or invoices are typically due within a certain period of time and can include interest charges if they are not paid on time.
  • Credit Card Debt: Credit card debt is a type of bill that is payable by an individual or company. This type of debt includes any bills that are incurred on a credit card, including purchases, balance transfers, and cash advances.
  • Bank Loans: Bank loans are another type of bill that is payable by an individual or company. These loans are typically secured by collateral and can involve interest charges if not paid on time.
  • Payroll Taxes: Payroll taxes are bills that are payable by employers. These taxes are typically based on the wages paid to employees and must be paid to the government on a regular basis.
  • Utility Bills: Utility bills are bills that are payable by consumers for services such as water, electricity, cable, and internet. These bills are typically due on a monthly basis and can include late fees if not paid on time.

Advantages of Bills Payable

Bills Payable offers several advantages for an individual or organization. They include:

  • Improved Cash Flow - Bills Payable allows an individual or business to purchase goods or services now and pay for them later. This can help to improve cash flow, allowing an individual or business to purchase items that they would otherwise not be able to afford.
  • Lower Interest Rates - Bills Payable often carries lower interest rates than other forms of debt, making it a more cost-effective way to manage short-term debt.
  • Flexibility - Bills Payable can be tailored to suit the individual or business needs. This allows them to choose the repayment terms, interest rates and other conditions that are most beneficial to them.
  • Easier to Manage - Bills Payable is much easier to manage than other forms of debt, as it only requires one payment each month. This makes it much simpler to keep track of payments and ensure that all bills are paid on time.

Limitations of Bills Payable

  • One of the main limitations of bills payable is that they involve a certain degree of risk. If the drawee of the bill fails to pay or is unable to pay when the bill matures, the drawee may have to pay additional fees or interest.
  • Another limitation of bills payable is that they require a certain amount of paperwork. The drawee has to submit paperwork to the payee in order to prove that they have the funds to pay the bill.
  • Furthermore, bills payable may not be accepted by all banks or financial institutions. If a drawee is unable to find a bank that will accept the bill, they may have to pay the bill in cash.
  • Additionally, bills payable are often subject to taxes and other fees. Depending on the country and the type of bill, the drawee may have to pay taxes or other charges in order to pay the bill.
  • Lastly, bills payable are often difficult to track. It can be difficult to know when the bill is due and whether it has been paid. This can cause delays in payment and lead to extra costs if the bill is not paid on time.

Other approaches related to Bills Payable

Apart from Bills Payable, there are other approaches related to liabilities such as Accounts Payable, Notes Payable, and Accrued Expenses.

  • Accounts Payable: Accounts Payable is a liability account that contains the amount owed to suppliers, vendors, or other organizations for goods and services purchased on credit.
  • Notes Payable: Notes Payable is a debt created when a business borrows money from a lender and signs a promissory note for repayment.
  • Accrued Expenses: Accrued Expenses are expenses that have been incurred but not yet paid. They are recorded in the same accounting period in which they are incurred.

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Author: Natalia Bielak