In accrual accounting, revenues are matched to the expenses used to generate them, and are recorded when incurred regardless of when cash is exchanged. This leads to a need for double-entry accounting where each transaction has at least one credit and one debit in the books. The entries made into this system are called journal entries. To journalize paying a bill in accounting, you must understand how the transaction affects the different accounts in your organization.
Double-entry accounting is based on the premise that assets will always equal the liabilities plus the equity of the business. Assets may include cash and cash equivalents, buildings, equipment, investments and more. Liabilities are amounts your business owes, such as balances with vendors, loan balances, revolving account balances and even settlement payments. The equity of the business is the difference between the assets and the liabilities and is affected by revenues and expenses.
Revenues increase equity and expenses decrease it. Negative equity means your business owes more than it owns. In double-entry accounting, accounts are kept in a balance where debits always equal credits. The normal balances for asset accounts are debits. Normal balances for liabilities and equity are credits. Since revenue increases equity, its normal balance is also a credit while expenses are debits. In this way, the equation stays balanced.
To journalize paying a bill, you must have already entered the bill into your accounting records. You will do this with the accounts payable account, which represents amounts your business owes to other parties from normal business operations. You may have received an invoice or bill from acquiring an asset or from incurring an expense, for example. You'd record the bill when you received it as an account payable, even though the final date for payment not fall due for another 15, 30 or 60 days.
Suppose you receive an invoice for the purchase of $50,000 of merchandise you will resell. This merchandise is inventory, an asset of your business. You will record this invoice as a debit to inventory and a credit to accounts payable.
You receive this month's electric bill in the amount of $850. Electricity is an expense. You will debit the utilities expense account and credit accounts payable.
When the bill or invoice is paid, it will affect accounts payable and cash. Because you are reducing the liability of accounts payable, it is the debit side of the transaction. You are reducing the cash asset, so you are going to credit cash. In the example below, assume we issue payments for both of the bills in our previous journal entries.
In short, you record the bill or invoice by debiting either an asset or an expense account, and by crediting accounts payable. When you pay the bill, you debit accounts payable and credit cash.