Eagleeye Bookkeeping Inc.
Phase 2 – Transaction Processing
Lesson 1 – Bills vs. Expenses & Accounts Payable
Learning Objectives
By the end of this lesson, the Junior Bookkeeper will be able to:
- Explain the difference between Bills and Expenses.
- Determine when each transaction type should be used.
- Understand the complete Accounts Payable workflow.
- Enter supplier bills correctly.
- Record immediate purchases correctly.
- Apply payments against Bills correctly.
- Recognize common Accounts Payable errors.
- Understand how Bills and Expenses affect financial statements.
Why This Matters
One of the most common bookkeeping errors is recording every supplier purchase as an Expense.
While this often results in the correct expense appearing on the Profit & Loss Statement, it fails to accurately record the business’s outstanding liabilities.
Using Bills correctly allows both Eagleeye and our clients to understand:
- What suppliers are still owed money.
- When payments are due.
- Which invoices are overdue.
- Future cash flow requirements.
- Accurate Accounts Payable balances at any point in time.
Our goal is to ensure financial reports accurately reflect both the company’s expenses and its outstanding obligations.
Understanding Accounts Payable
Accounts Payable (AP) represents money the business owes to suppliers for goods or services that have already been received but have not yet been paid.
When an invoice is received, the expense has already occurred, even if payment will not be made until a later date.
Because the business now owes money, a liability is created on the Balance Sheet.
For example:
ABC Plumbing repairs the office furnace and issues an invoice with payment terms of Net 30.
Although no money has left the bank account, the business now has an obligation to pay the supplier.
That obligation belongs in Accounts Payable until payment is made.
What is a Bill?
A Bill records an expense that has been incurred but has not yet been paid.
Use a Bill whenever:
- A supplier sends an invoice.
- Payment will occur at a later date.
- Payment terms exist (Net 15, Net 30, etc.).
- The transaction should appear in Accounts Payable.
Examples include:
- Utility invoices
- Accountant invoices
- Monthly bookkeeping invoices
- Office supply invoices
- Equipment invoices awaiting payment
- Vendor invoices received by email
Entering a Bill increases both the appropriate expense account and Accounts Payable.
What is an Expense?
An Expense is used when payment occurs immediately.
No Accounts Payable balance is created because there is no outstanding obligation.
Examples include:
- Fuel purchased with a debit card.
- Office supplies purchased with a company credit card.
- Parking paid immediately.
- Subscription services automatically charged to a credit card.
- Restaurant purchases paid at the time of service.
Recording an Expense immediately reduces the bank or credit card balance while recognizing the expense.
Bill Workflow
A typical Accounts Payable process follows these steps:
- Goods or services are received.
- The supplier issues an invoice.
- The invoice is entered into QuickBooks as a Bill.
- Accounts Payable increases.
- The invoice appears on the Vendor Aging Summary.
- Payment is made at a later date.
- The Bill is paid using the Pay Bills function.
- Accounts Payable decreases.
- Cash decreases when the payment clears the bank.
This process ensures liabilities remain accurate until payment occurs.
Expense Workflow
When payment occurs immediately, the workflow is much simpler:
- Goods or services are purchased.
- Payment occurs immediately.
- The transaction is entered as an Expense.
- Cash or the credit card balance is reduced.
- No Accounts Payable balance is created.
Financial Statement Impact
Understanding how Bills and Expenses affect the financial statements is critical.
Entering a Bill
A Bill will:
- Increase the appropriate Expense account on the Profit & Loss Statement.
- Increase Accounts Payable on the Balance Sheet.
Paying a Bill
Paying a Bill will:
- Decrease Accounts Payable.
- Decrease the bank account balance.
No additional expense is created because the expense was already recognized when the Bill was entered.
Recording an Expense
An Expense will:
- Increase the appropriate Expense account.
- Reduce the bank account or credit card balance immediately.
No Accounts Payable account is involved.
Vendor Aging Summary
The Vendor Aging Summary is one of the most important reports for monitoring Accounts Payable.
It provides information including:
- Outstanding supplier balances.
- Individual unpaid invoices.
- Invoice due dates.
- Overdue amounts.
- Total liabilities owed to suppliers.
This report only functions correctly if unpaid invoices are entered as Bills.
If everything is entered as an Expense, the Vendor Aging Summary becomes inaccurate or empty.
Common Errors
Recording Every Purchase as an Expense
This is the most common Accounts Payable error.
While expenses may appear correct, there is no record of outstanding invoices.
As a result:
- Vendor Aging reports become inaccurate.
- Cash flow planning becomes more difficult.
- Outstanding liabilities are understated.
Entering a Bill After Recording an Expense
Sometimes a transaction is recorded as an Expense when payment has not yet occurred.
Later, the invoice arrives and another transaction is entered as a Bill.
This duplicates the expense and overstates both expenses and liabilities.
Always determine whether a transaction has already been recorded before entering a Bill.
Paying Bills by Creating Another Expense
A Bill should never be paid by entering another Expense transaction.
Doing so creates duplicate expenses while leaving the original Bill outstanding in Accounts Payable.
Instead, Bills should always be paid using the Pay Bills function in QuickBooks.
Deleting Paid Bills
Paid Bills should not be deleted simply because they no longer appear outstanding.
The Bill and its associated payment provide a complete audit trail showing:
- When the expense occurred.
- When payment was made.
- Which bank account was used.
- Which supplier was paid.
Maintaining this history is essential for accurate bookkeeping and future reference.
Why Eagleeye Uses Bills Properly
Accurate Accounts Payable records allow us to:
- Produce reliable financial statements.
- Prepare accurate year-end working papers.
- Monitor vendor balances.
- Assist clients with cash flow planning.
- Improve audit readiness.
- Reduce duplicate transactions.
- Provide more meaningful financial reporting.
Using Bills correctly improves both bookkeeping accuracy and the quality of advice we can provide our clients.
Eagleeye Research Standard
Before correcting or entering any Accounts Payable transaction:
- Review the supplier invoice.
- Confirm whether payment has already occurred.
- Search for existing Bills or Expenses that may already record the transaction.
- Review historical transactions for consistency.
- Confirm supporting documentation.
- Explain your reasoning before requesting assistance.
The objective is to develop independent problem-solving skills while maintaining accurate financial records.
Competency Checklist
Upon completion of this lesson, the Junior Bookkeeper should be able to demonstrate the following competencies:
□ Explains the difference between Bills and Expenses.
□ Understands the purpose of Accounts Payable.
□ Correctly identifies when to use a Bill.
□ Correctly identifies when to use an Expense.
□ Understands the complete Bill workflow.
□ Understands how Expenses differ from Bills.
□ Understands how Bills affect the Balance Sheet and Profit & Loss Statement.
□ Can explain the purpose of the Vendor Aging Summary.
□ Recognizes common Accounts Payable errors.
□ Demonstrates independent research before escalating questions.