How to Record Payment to a Vendor with a Purchase Made by the Same Vendor?

We can use a barter cash account to show that a specific product reduced the customer and vendor balances when creating payments and paying bills, @IRS Tax X Relief.

To record it correctly, we can create a new barter cash account and name it Product 2. This account will serve as the product and as a clearing house to reflect deducted customer and vendor balances.

Here's how:

1. Go to Settings ⚙ then select Chart of accounts.
2. Select New to create a new account.
3. Under the Account Type ▼ dropdown, select Bank.
4. From the Detail Type ▼ dropdown, choose Cash on hand.
5. Enter the account name Product 2.
6. Select Save and Close.

Once done, let's create a billable expense transaction to show that this charges the client.

1. Click +New and then select Bills.
2. From the Vendor field, choose Vendor A.
3. Select Product 1 and then mark the item as billable.
4. From the Customer/Project column, pick the Client.
5. Hit Save and close.

Next, create an invoice for the client and add the bill.

1. Go to + New and then select Invoice.
2. From the Add to Invoice section, click Add.
3. Hit Save and close.

Then, you'll want to use the barter account we created (Product 2) when receiving client payments. Doing this will offset customer balance. Let me show you how:

1. Click + New and then select Receive payment.
2. Pick the client from the Customer field.
3. Check the invoice box, and from the Amount received field, enter 20,000.
   Choose the barter account we created Product 2 from the Deposit to field..
4. Hit Save and close.

Once done, you'll want to use the 20,000 from Product 2 to offset the vendor bill balance by using Pay Bills. Here's how:

1. Go to + New and then select Pay Bills.
2. From the Payment account field, choose Product 2.
3. Enter 20,000 in the Payment field.
4. Hit Save and close.

I'm sharing this resource for more insights: Record a barter transaction.

As you check the customer and vendor balances, you can see that both have $80,000 waiting for payment. You'll want to record customer payments and mark the vendor bills as paid later.

I'm still here if you need more assistance with recording transactions. Anytime I can help. Keep safe, and have a prosperous month ahead.

@IRS Tax X Relief  

The instructions provided by @Jovychris_A are far too complicated. 

Create a bank account in QB called "Clearing Account".  Then, receive payment on the $20K invoice to Vendor A (Customer A, actually) and deposit it to the Clearing Account.  Then, pay $20K on the $100K bill using the same Clearing Account.  You now have the $20K invoice shown as paid, a balance of $80K remaining on the bill from Vendor A and the Clearing Account balance is $0.