What Is a Bill in Accounting? Definition & Examples

A bill in accounting is a formal request for payment, detailing a financial obligation incurred for goods received or services rendered. It serves as a fundamental document in tracking money owed or money due within a business. Understanding bills is central to managing cash flow and maintaining accurate financial records, as they mark the point when a financial commitment is formally established, even before any money changes hands.

What is a Bill in Accounting

In accounting, a bill is a documented request for payment from a seller to a buyer for products or services provided. When a business receives a bill, it acknowledges an amount owed to a supplier or vendor. Conversely, when a business issues a bill, it requests payment from a customer for goods delivered or services completed. This document is a source record, providing initial data for financial entries in a company’s accounting system.

A typical bill outlines several components. It specifies the amount due, identifies the payer (the entity owing the money) and the payee (the entity to whom the money is owed). The bill also includes the date of issue, a description of the goods or services provided, and the payment terms. These terms might include the due date, any discounts for early payment, or penalties for late payment.

Different Types of Bills

Businesses encounter various types of bills, arising from distinct transaction scenarios. These categories help organize financial obligations.

Purchase Bills/Vendor Bills

Purchase bills, also known as vendor bills, are received by a business from suppliers for goods or services acquired on credit. For example, a retail store ordering inventory receives a purchase bill once goods are delivered. These bills establish an accounts payable liability, indicating money owed to vendors.

Sales Bills/Customer Bills

Sales bills, often called customer bills, are issued by a business to clients for goods sold or services rendered. For instance, a consulting firm sends a sales bill to a client after completing a project. While frequently called invoices by the issuer, the recipient considers this document a bill.

Utility Bills

Utility bills are recurring bills for essential services like electricity, water, internet, and gas. These bills arrive regularly, detailing consumption and charges. From an accounting perspective, utility bills represent an expense incurred for the period of usage.

How Bills are Processed in Accounting

Processing bills involves a structured workflow within a business’s financial system for accurate record-keeping and timely payments. This process begins with the bill’s receipt or creation.

Upon receiving a bill, a business records it in its accounts payable system. This creates a liability, increasing “Accounts Payable,” which represents short-term debts owed to suppliers. The bill serves as the source document justifying this entry.

Bills impact financial statements. Recording a purchase bill increases liabilities on the balance sheet and an expense account on the income statement (e.g., “Cost of Goods Sold” or “Utilities Expense”). For instance, a utility bill for prior month’s electricity usage is recorded as an expense under accrual accounting, even if payment is due later. Conversely, issuing a sales bill increases “Accounts Receivable” (an asset) on the balance sheet and a revenue account on the income statement. This connection is fundamental to accrual accounting, where transactions are recorded when they occur, not necessarily when cash is exchanged. The processing workflow often includes invoice capture, verification against purchase orders, approval, and eventual payment, which then reduces the recorded liability.

Distinguishing Bills from Other Documents

Understanding the differences between a bill and other financial documents is important for clear communication and record-keeping. While some terms are used interchangeably, they serve distinct purposes.

A bill and an invoice are often considered the same, but their usage differs by perspective. From the seller’s view, it’s an invoice; from the buyer’s, it’s a bill. Invoices are typically more detailed, including unique numbers, contact details, payment deadlines, and itemized lists. Bills, especially in retail, might be less formal and state only the total due.

A bill is a request for payment for goods or services provided but not yet paid for. A receipt is proof of payment, issued after the transaction is completed and payment received.

A purchase order (PO) precedes a bill. A PO is created by a buyer to initiate a purchase, outlining desired goods, quantities, and prices before delivery. It acts as a formal agreement to buy. A bill is a request for payment issued by the seller after goods or services are provided.