Difference Between Account Payables and Bills
As bills represent obligations to pay funds for goods or services, it may appear that there is very little difference between a business’ bills and its accounts payable. But while bills document a wide variety of payment requirements associated with goods or services, accounts payable are limited to a narrower range of obligations. As a result, accounts payable has a specific identity and is included in financial reports as a liability, while bills influence multiple accounts on the balance sheet, but are not specifically listed.
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Bills
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Bills are merely invoices categorizing obligations to be paid. While these invoices notify people of an obligation to pay, that obligation could take several forms. The most common forms of bills detail payment due on goods and services already delivered. However, some billing arrangements are in anticipation of services or goods provided. An example would be rent. In many rental arrangements, the tenant pays on the first of the month for the use of the property during that month. While a bill may identify a payment obligation, whether that requirement relates to work already done by the person issuing the bill depends on the circumstances.
Accounts Payable
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Accounts payable are the obligations a business owes to other enterprises for goods and services already received by the business. Accounts payable are meant to keep track of expenses that have already been recognized by the business, but have not been paid. There are two relevant methods of expense recognition that relate to accounts payable. The first relates to cause and effect, where revenues -- as earned -- generate associated expenses. An example of this is sales commissions, where money is owed to a salesperson after he completes a transaction with a customer. Some expenses are incurred to obtain an immediate benefit, but are not immediately paid off. In both cases, the expenses need to be recognized immediately, regardless of payment, to provide an accurate depiction of financial activity. As a result, when an expense is recognized but not paid, the business should record an expense to offset income, as well as increase the accounts payable balance.
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Financial Reporting
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Bills are not reported on financial statements, but the payment of bills will need to be reflected on a business’ balance sheet. Payment of a bill for goods or services provided decreases liabilities, specifically accounts payable, and decreases cash. However, payment of a bill for goods or services to be provided in the future also decreases cash, but increases the asset’s prepaid expenses. Prepaid expenses are the measure of goods or services the business has already paid for.
Considerations
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When preparing financial statements, consult with a certified public accountant to ensure that everything is done according to the appropriate accounting guidelines. This article does not provide legal advice; it is for educational purposes only. Use of this article does not create any attorney-client relationship.
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