Should I enter my vendor bills into the books and then pay them from the bill, or just record the expense when the money leaves the bank — and how does the bill-then-payment cycle actually work?

What changes when you enter bills?

Entering a bill records a debt before any money moves. AccountingTools' article on accounts payable defines accounts payable as short-term obligations to pay suppliers for products and services purchased on credit. The bills you enter form the payables ledger, which AccountingTools' definition of the accounts payable ledger says holds the detail for all invoices received from suppliers and lets a business monitor its obligations and due dates. In QuickBooks Online, Intuit's help page on entering bills says bills are entered to track your accounts payable; whether another system keeps this ledger is a question for that system's own documentation. From the ledger come a list of open bills, a balance for each vendor and the accounts payable aging report, which AccountingTools' definition of that report says sorts payables to suppliers into time buckets. Reading the aging and choosing what to pay first is a separate question.

The price is a second entry for every bill. Intuit's QuickBooks Online help page on the differences between bills, checks and expenses says the primary difference between them is the timing of the payment: a bill records something you will pay in the future, while a check or expense records the expense and the payment at the same time.

Recording cost only at payment keeps one entry per purchase, and the books match what has left the bank. What it hides is every bill received and not yet paid: no report lists those bills, no vendor balance shows them, and nothing in the books says what you owe suppliers on a given date.

Which method should your business run?

Three facts decide it:

• How long bills wait. Each day between receiving a bill and paying it is a day the pay-only books leave that debt out.
• How many bills arrive. A few bills a month can be tracked from the documents; many bills across several vendors are where vendor balances and the aging report repay the extra entry.
• Whether an outside party needs obligations shown when incurred. If a lender, investor or outside accountant requires accrual-basis statements, unpaid bills must then appear in those statements, whether by entering bills or by an adjustment kept outside the books, as explained below.

If your books are already on the accrual basis, the question is largely settled, as the section on the accounting basis explains.

What if you pay almost every bill the day it arrives?

Record the cost at payment. AccountingTools' article on accounts payable says a payable arises whenever a supplier delivers goods or services for which payment is not immediately made in cash, so a bill paid on arrival leaves nothing owed to track. Revisit the choice once bills start to sit unpaid, above all across a month-end or year-end you report on: pay-only books leave out debts that exist on that date.

What if a lender or accountant needs accrual-basis statements?

That is the lender's or accountant's own requirement. The FASB's Conceptual Framework describes accrual accounting as recording effects in the periods in which they occur, even if the cash payments occur in a different period. Statements on that basis need, among other things, every bill for goods or services already received, and still unpaid at the statement date, recorded as a liability; AccountingTools' guide to converting cash-basis books to accrual says to add back expenses for which the company has received a benefit but has not yet paid the supplier. Unpaid bills are only part of accrual-basis statements (the guide also lists items such as wages earned but unpaid); what else the statements must include is for the lender or accountant to specify. Two routes put those unpaid bills into the statements without counting any cost twice:

• Enter bills as they arrive. The unpaid bills are then in the books on any date.
• Keep recording at payment and adjust outside the books. The same AccountingTools guide says the conversion may be easier to manage on a separate spreadsheet kept out of the formal records, which leaves your day-to-day books unchanged. The guide also warns that some transactions may well be missed and that a very complete set of records is required; pay-only books hold no list of unpaid bills, so this route works only if every unpaid bill is kept somewhere you can total at the statement date.

An adjustment posted into books that record cost at payment must be reversed at the start of the next period, or the payment records the same cost again: AccountingTools' article on reversing entries says a reversing entry typically occurs at the beginning of a period, and shows a forgotten reversal leaving the same expense in two months.

What does entering a bill post?

One entry, carrying the bill's date. AccountingTools' article on accounts payable gives it: debit the expense or asset account the purchase relates to, and credit accounts payable; the invoice is recorded using the invoice date as the entry date. Intuit's help page on entering bills in QuickBooks Online asks for the bill date, due date and bill number exactly as they appear on the bill. The due date posts nothing; it records when payment is expected. On the accrual basis the cost counts at the bill's date; on the cash basis it counts only when the bill is paid, as the section on the accounting basis explains. If the work was done in an earlier month than the bill's date, getting the cost into that month is a separate question.

What does paying the bill post, and why is it not a second expense?

When the bill is paid in full, the payment is a second entry that touches only the liability and the bank. AccountingTools' article on accounts payable says that when the liability is paid, the entry is a debit to accounts payable, which eliminates the liability, and a credit to cash. With an early-payment discount, less cash goes out: AccountingTools' article says the discount portion is charged to a separate account, recording the reduction in the amount owed, so it is not an unpaid remainder. The expense account is left alone because the bill already recorded the cost; the payment settles the debt the bill created. Intuit's page on bills, checks and expenses says a bill must be closed through Pay bills in QuickBooks Online, and that paying it with a check or expense instead may leave the bill showing as unpaid and will not reduce the vendor balance.

Suppose a printer's bill dated March 4 for 1,200.00 of printing is paid on April 2:

The printer's open balance at each stage:

Recorded only at payment, the same bill is a single April 2 entry, and the 1,200.00 owed appears nowhere in the books during March:

The cycle is the same when a card settles the bill: Intuit's page on bills, checks and expenses lists recording a credit card payment for a bill among the uses of Pay bills in QuickBooks Online. The payment still debits accounts payable; the credit goes to the card account instead of the bank.

How do you apply one payment to one bill, part of a bill, or several bills?

Apply every payment to the specific bills it settles. The payment debits accounts payable by the total applied, and each bill stays open for whatever remains unpaid on it, apart from any early-payment discount taken. In Zoho Books, Zoho's undated help page on recording multiple bill payments has you pick the vendor to see all of its unpaid bills and enter the amount paid for each bill; each bill is then marked Paid or Partially Paid based on the amount entered. The printer's bill above is the one-bill, paid-in-full case. Here are the other two, for a supplier with three open bills:

On April 10 you pay 1,050.00 and apply it to bills 101 and 108 in full (400.00 plus 650.00); bill 115 stays open for 900.00. On April 25 you pay 500.00 against bill 115, leaving 400.00 open on that bill, and that 400.00 is now the supplier's whole balance. Each payment is one entry:

What does the open-bill balance on your balance sheet mean?

On an accrual-basis balance sheet, accounts payable at any date is the total of every bill entered and not yet paid on that date, including the unpaid part of a partly paid bill, and AccountingTools' article on accounts payable says it normally appears near the top of the liabilities section of the balance sheet. It is not the cash you need today. The same article says payables are generally due within a short period, such as 30 days from the invoice date, so each bill falls due on its own day. The 1,950.00 owed on March 31 in the example is three bills with three dates, not one amount due at once.

The balance-sheet figure and the vendor detail are two views of the same bills. AccountingTools' definition of the accounts payable ledger says the general ledger balance for accounts payable is compared with the ledger's ending balance to make sure the two match, at each period-end close. So at each period-end, compare the total of open bills by vendor, or the aging total, with the accounts payable line. Run the balance sheet on the accrual basis for this comparison: Intuit's page on cash and accrual methods says accounts and balances in QuickBooks Online reports might show up differently under the other method, and that any single report can be switched to it. A vendor's own statement gives a check from outside your books; the ledger definition says the ledger simplifies reconciliation between vendor statements and internal records. Of these checks, only the vendor's statement catches a bill paid by check or expense instead of against the bill: such a bill stays open in both the vendor detail and the accounts payable line, so the two still match. Finding and fixing a balance that does not tie is a separate question.

How does this choice fit with cash- or accrual-basis books?

In QuickBooks Online, entering bills sits alongside the basis without changing it: the basis decides when a cost counts in your reports, and entering bills decides whether unpaid bills are recorded at all. Whether another system can hold entered bills while reporting on the cash basis is a question for that system's documentation.

What if your books are on the accrual basis?

The question is largely settled. On that basis, as defined above, bills unpaid at a reporting date belong in the books, and entering them is the ordinary way to put them there. A purchase paid on the spot can still go straight to expense.

What if your books are on the cash basis?

AccountingTools' guide to converting cash-basis books to accrual says that under the cash basis, transactions are recorded only when the related cash is issued or received. Entering bills does not change that in QuickBooks Online: Intuit's help page on choosing cash or accrual methods says a cash-basis report counts expenses only once you pay a bill, while an accrual-basis report counts them whether or not the bill is paid, and any single report can be run on the other method to compare. So in QuickBooks Online a cash-basis business can enter bills to see what it owes while its cash-basis reports still count each cost when it is paid.

Which basis the books should be on, and why profit differs between the two, is covered in the related question below.

What goes wrong if you mix the two methods?

Mixing means one cost goes through both routes: the bill is entered, and the payment is then recorded as a new expense instead of against the bill. With the printer's bill:

Printing expense in the ledger now holds 2,400.00 for a 1,200.00 bill, and the 1,200.00 in accounts payable is never cleared, so the books show the printer as owed money you have paid. How it shows depends on the report's basis. An accrual-basis report shows the doubled expense at once. A QuickBooks Online cash-basis report leaves out the unpaid bill, so the cost appears once and the error shows only as a bill still open; it becomes a second cost as soon as a payment is recorded against that bill, and an open bill that was in fact paid can be paid again.

The other form is mixing by vendor: entering bills for some suppliers and paying others straight from the bank. Accounts payable then holds an unknown share of what you owe and cannot be compared from month to month as the mix shifts; AccountingTools' article on accounts payable ties accurate records to liabilities being recorded in full and in the correct periods. The rule that prevents both: from a set start date, every bill you do not pay on the spot goes through the bill cycle, for every vendor; a purchase paid on the spot is recorded once, as an expense; and a bill that straddles the start date goes through one route only. Which date such a bill carries, and so which period its cost falls in on accrual-basis reports, is a period cut-off question handled separately. Repairing a payables balance already damaged by mixing is a separate question.