It's 11:47 PM and you're staring at your QuickBooks screen, wondering if you're about to mess up your books. Meanwhile, that $1,500 vendor invoice sits there, waiting. But you can't shake the feeling that one wrong click will make your accountant sigh during next quarter's review.
Even successful business owners sometimes still feel like they're guessing: when you record this bill, does it get debited or credited? Here's what you need to understand: Bills payable are liabilities, and liabilities increase with credits. Understanding this helps transform your cash flow management from reactive scrambling to proactive planning.
Bills payable and your business finances
Bills payable represent more than numbers on a balance sheet. They're essential indicators of your financial health and cash flow planning ability.
Think of your business like a restaurant running a tab system. When customers order food, you provide the meal immediately but let them pay later. Those unpaid meals represent money customers owe you—that's accounts receivable. Bills payable work in reverse. When your office supply vendor delivers $500 worth of materials but agrees to let you pay in 30 days, that $500 becomes your bill payable.
Accounts payable is the total tab your business runs with all suppliers combined, like a credit card statement balance showing everything you owe. Bills payable are the individual line items: each software vendor invoice, office supply bill, and contractor payment. These individual bills, when added together, equal your total accounts payable balance.
Poor bills payable tracking creates predictable problems. You check your bank balance, see $20,000, and feel confident about that equipment purchase. Then three vendor payments totaling $15,000 hit your account next week. Your income statement shows healthy profit, but your checking account can't cover payroll. This creates the "profitable but broke" paradox. Proper tracking transforms the question from "What's my bank balance?" to "What's my bank balance minus committed payments?"
The debit or credit answer
Now let's demystify the accounting mechanics. The confusion often stems from trying to remember arbitrary rules rather than understanding the logic. Once you grasp the fundamental principle, you'll never second-guess these entries.
Your bank statement is written from the bank's perspective. When you deposit $1,000, the bank credits your account because you become a liability to them: they owe you that money. In your business accounting, liabilities work the same way. When you owe more to a supplier, you credit it. When you receive something on credit, you record two things: what you received becomes a debit to the asset or expense, and the source becomes a credit to the liability.
You only debit bills payable when reducing it by making a payment. When you pay that $1,500 supplier invoice:
Debit: Accounts Payable $1,500 (reduces what you owe)
Credit: Cash $1,500 (reduces your bank balance)
Both sides decrease by the same amount. The debit removes the obligation while the credit reflects money leaving your account.
This follows the fundamental accounting equation: Assets = Liabilities + Equity. Assets live on the left side and increase with debits. Liabilities and equity live on the right side and increase with credits. When you borrow $10,000 from the bank, you debit Cash $10,000 (increasing assets) and credit Bank Loan Payable $10,000 (increasing liabilities). The equation stays balanced.
Recording bills payable: step-by-step entries
Modern accounting software handles double-entry bookkeeping automatically. Follow these steps to maintain accurate records and avoid common pitfalls.
When the bill arrives: your first entry
When you receive an invoice, record it immediately to maintain accurate accounts payable. In QuickBooks Online, use the "Bill" feature under "Expenses."
Your software automatically creates this entry:
Debit: Office Supplies Expense $500
Credit: Accounts Payable $500
This records the expense and creates the liability. Your expense account increases while your accounts payable increases. Your cash balance hasn't changed yet.
When you pay the bill: the payment entry
When ready to pay, use QuickBooks Online's "Pay Bills" feature, not the general "Expense" entry. This properly reduces your accounts payable balance.
Before saving, verify that vendor name, bill date, due date, payment date, payment method, amount, bank account, and reference number all match correctly. Your QuickBooks screen should show the bill amount reducing your accounts payable before you save.
Common recording mistakes to avoid
Even experienced bookkeepers reverse debits and credits occasionally. Here are the mistakes that cause the most problems:
Mistake 1: Reversing the debit and credit on initial recording
What it looks like:
Debit: Bills Payable - $3,000
Credit: Office Supplies - $3,000
Why it's wrong: This decreases your liability (when you should be increasing it) and decreases your asset (when you should be increasing it). Your books now show you paid for something you haven't received and don't owe money you actually do.
The fix: Always increase bills payable with a credit when recording a new obligation. Always increase the corresponding asset or expense with a debit.
Mistake 2: Recording the payment backwards
What it looks like:
Debit: Cash - $3,000
Credit: Bills Payable - $3,000
Why it's wrong: This increases your cash (when you just spent it) and increases your liability (when you just paid it off). You'll show more money and more debt than reality.
The fix: When paying bills, debit the liability to reduce it and credit cash to reduce it.
Mistake 3: Recording bills payable as expenses instead of liabilities
What it looks like:
Debit: Office Supplies Expense - $3,000
Credit: Cash - $3,000
Why it's wrong: This completely bypasses the liability account. Your balance sheet won't show what you owe, and you're recording the expense before you've actually paid for it.
The fix: Use a two-step process. First, record the bill payable when you receive goods. Second, record the payment when you actually pay. This gives you accurate liability tracking and proper expense timing.
Mistake 4: Failing to record bills payable at all
What happens: You wait until payment time to make any entry, recording it as a simple expense payment with no liability involved.
Why it matters: Your financial statements miss a critical liability. If you run reports before payment, they understate what you owe. This distorts your current ratio, working capital, and overall financial position.
The fix: Record bills payable when the obligation arises, not when you pay it. This accrual accounting provides accurate financial snapshots at any point.
Accrual versus cash accounting: bills payable implications
Your accounting method fundamentally changes how bills payable affect your decisions. The difference isn't academic—it directly impacts visibility into financial obligations and available cash.
Under accrual accounting, you record expenses when you receive goods or services, regardless of when you pay. This creates bills payable entries that provide crucial cash flow forecasting. For growing businesses, accrual accounting reveals the timing gap between earning profit and having cash available. You can see what you owe each vendor and when payments fall due, enabling better cash management.
Cash accounting only records transactions when money changes hands. Bills you've received but haven't paid don't appear in your records until payment occurs. This works for very small businesses with simple operations, but hides critical information as you grow. You lose visibility into committed payments and timing, making it harder to plan cash needs.
According to Wolters Kluwer, proper accounts payable management optimizes cash flow through strategic payment timing. This helps avoid late fees, maintain supplier relationships, and capture early-payment discounts.
From confusion to clarity with bills payable
Your next vendor bill arrives the moment you finish a project or receive supplies. In that moment, you need to record it correctly. Not just to satisfy your accountant, but to know what cash you actually have available for growth decisions.
Most businesses record bills when they remember to, check their bank balance before major purchases, and hope they accounted for everything. That's how you end up making hiring decisions or equipment purchases without seeing the complete picture.
The answer isn't better spreadsheets or more accounting discipline. It's infrastructure that tracks committed expenses automatically and shows what's truly available. Relay's banking platform gives you multiple accounts that separate money by purpose, automated rules that handle allocations, and real-time visibility into what's committed versus what's free to use.
Request a demo to see how Relay works and make decisions with confidence instead of midnight math.
Relay is a financial technology company and is not an FDIC-insured bank. Banking services provided by Thread Bank, Member FDIC. FDIC deposit insurance covers the failure of an insured bank. Certain conditions must be satisfied for pass-through deposit insurance coverage to apply.
