Your bank balance says you have $47,000 available, which would be great news if it were actually true. But between that supplier invoice sitting on your desk, next week's payroll, and the quarterly tax payment you keep mentally postponing, the actual number you can spend is closer to $12,000. The gap between what appears available and what's already spoken for catches business owners off guard constantly.
Understanding bills vs expenses is the foundation of closing that gap. This guide breaks down what each term means, how accounts payable differs from recorded costs, and why the distinction matters for cash flow planning. When you know exactly what you owe versus what you've already paid, financial decisions stop feeling like guesswork and start feeling like strategy.
What Is a Bill in Business Accounting?
That invoice sitting on your desk creates a blind spot in your cash planning if you don't track it separately from what you've already paid. Your supplier delivered $2,500 in materials last week, but you haven't paid for them yet. In accounting terms, that invoice is a bill: a transaction that needs to be paid at a future date.
The key characteristic: you haven't paid yet. The pipes and fittings are already in your truck, already being used on jobs, but the cash hasn't left your account. Bills create what accountants call accounts payable: money your business owes to others, recorded as a liability on your balance sheet. Think of it as money that's already spent in spirit, just not in practice.
Common examples include:
Vendor invoices for materials and supplies
Utility statements for electricity and internet
Rent notices from landlords
Professional service invoices from accountants and lawyers
Subcontractor invoices for work completed on your jobs
Each represents an obligation, not a completed transaction.
Why this distinction matters: Bills give you something expenses don't: time. Time to plan payments, prioritize based on due dates, and ensure cash is available when obligations come due. Recording a bill doesn't reduce your bank balance; it simply acknowledges you've committed those funds to a specific purpose. Tools like Relay's purpose-built accounts1 help you set aside funds for these committed obligations before they come due.
1Relay 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.
What Is an Expense in Business Accounting?
When money leaves your account immediately, you lose the ability to plan around that payment. You just swiped your business card for $150 in emergency parts because a job went sideways. The money left your account immediately, and that's an expense. Deductible business expenses must be "ordinary and necessary" for operating your trade or business, meaning common in your industry and helpful for your operations.
The critical timing difference: You recognize expenses based on your accounting method. Cash-basis businesses record expenses when payment occurs. Accrual-basis businesses record expenses when the cost is incurred, regardless of payment timing.
Bills work differently: they create a tracked obligation in your accounts payable that you manage and pay when the due date arrives.
Common expense categories include:
Office supplies and consumables
Professional services paid at the time of service
Software subscriptions charged automatically
Travel costs paid by card
Marketing spend processed immediately
Each reduces your available cash or increases credit obligations the moment you record them.
Impact on your financials: Expenses flow directly to your income statement, reducing your profit for the period. Getting categories right means cleaner reports and fewer missed deductions at tax time.
Bills vs Expenses: Key Differences
Two business owners buy identical $500 worth of office supplies. One records a bill, the other records an expense, and both are correct. The difference isn't what they purchased but whether payment has already happened. The sections below break down exactly how timing, bookkeeping entries, cash flow impact, and software workflows differ.
Timing of Recognition
You record bills the moment you receive a vendor invoice, completely independent of when cash leaves your account. Entering a bill creates a record of money owed without touching your bank balance.
Expenses, by contrast, hit your books when payment happens. Write a check, swipe a card, or transfer funds, and you recognize the expense immediately.
Consider a $500 electricity bill received January 25th but paid February 10th. The bill entry happens in January, creating an accounts payable liability. The utilities expense appears on your January income statement, matching the cost to when electricity was used. But your cash doesn't decrease until February when payment processes.
Bookkeeping Entries
Bills create entries on both your balance sheet and income statement simultaneously. The liability appears in accounts payable (balance sheet) while you record the expense in the appropriate category (income statement) at the time you receive the bill, not when you pay it.
Direct expenses reduce cash or increase credit card balances while also appearing on your income statement under their assigned categories. No accounts payable entry exists because there's nothing unpaid to track.
This two-part approach is why bills provide better financial visibility. Your income statement tells you what things cost; your balance sheet tells you what you still owe.
Cash Flow Impact
Bills let you see what's coming before you have to pay it. Your accounting software can generate accounts payable aging reports showing exactly what's due, when it's due, and to whom. This lets you anticipate cash needs 30, 60, or 90 days out.
Expenses offer no such planning window. The decision already happened.
With bills properly tracked, you know exactly what obligations are coming due, giving you accurate visibility into available cash for new decisions. Without bill tracking, you might approve a new equipment purchase based on your account balance, then scramble when payroll comes due.
For businesses managing tight margins, maintaining several months of operating expenses in accessible accounts can help buffer against cash flow gaps.
Software Workflow
QuickBooks Online and similar platforms handle bills and expenses through fundamentally different workflows. Bills follow a two-step process: enter the bill first to create a liability in accounts payable, then pay it later using a separate "Pay Bills" function. This creates a clear audit trail linking the original obligation to its payment.
Expenses recorded through direct payment follow a single-step process: you record the transaction once, capturing both the expense recognition and payment simultaneously.
The most common bookkeeping mistake happens when business owners pay a bill but record it as a direct expense instead of using the "Pay Bills" feature. This breaks the connection between the bill and its payment, leaving the original liability showing as unpaid even though money has left the account.
Tax Documentation Requirements
The IRS doesn't distinguish between bills and expenses for deduction purposes. What matters is whether the cost qualifies as ordinary and necessary, directly connected to your business, reasonable in amount, and provable with proper documentation. The timing of when you can deduct depends on your accounting method: cash basis when paid, accrual basis when incurred.
Proper documentation includes receipts showing amount, date, and payee, plus records demonstrating business purpose. Retain records at least three years from filing, with longer periods (six to seven years) for underreported income or bad debt claims.
Real-World Examples for Trades and Services
Categorizing the same purchase differently comes down to one factor: whether payment has already occurred.
A plumbing contractor receives a $1,500 invoice from their wholesale supplier with Net 30 terms. This goes in as a bill because payment will happen later. The same plumber runs to a retail store and buys $150 in parts with their business card during an emergency. That's an expense, recorded immediately.
Monthly utilities typically arrive as bills with payment due dates. If you receive an invoice with a future due date and use the "Pay Bills" feature, record it as a bill. If payment happens immediately through auto-draft or card, record it as an expense.
Software subscriptions show the same split. An annual invoice for project management software with 30-day terms is a bill. Monthly charges that auto-process to your credit card are expenses.
The simple decision rule: Did we pay already? If yes, it's an expense. Did we receive an invoice with a future due date? If yes, it's a bill.
Take Control of Your Business Cash Flow
The distinction between bills and expenses comes down to one question: has payment happened yet? Bills represent obligations you haven't paid, creating liabilities in accounts payable. Expenses represent costs already settled, with cash already moved.
Knowing this difference changes how you interpret your bank balance. That available number isn't really available until you subtract what's committed to unpaid bills.
Relay helps you maintain that visibility by letting you create separate accounts1 for different purposes: one for operating expenses, another for payroll, a third for taxes. When committed funds sit in dedicated accounts rather than mixed with available cash, you always know exactly what you can spend.
Open a Relay account to see how purpose-built accounts bring clarity to your cash flow decisions.
1Relay 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.
