Accounts payable and bills payable have many similarities. In fact, they are often used interchangeably. Both accounts payable and bills payable indicate a monetary obligation to an outside party. However, while accounts payable only include a certain type of transactions, bills payable include three different types of transactions.
When a business purchases goods or services, it does not always pay immediately for them. Instead, the business may purchase on credit and only pay at a future date. After incurring the obligation to pay and before actually paying the debt, the business records the amount of money owed either as an account payable or as a bill payable. While accounts payable always refer to this kind of financial obligation, bills payable also apply to other types of debts.
When a business needs funds to support its operations, the business can get the money by taking on bank loans, by selling company shares or by issuing promissory notes. By issuing a note, the business promises to pay the lender the amount of money borrowed, plus any interest and other charges. The terms of these notes are usually less than one year. Bills payable, not accounts payable, may include these short-term notes.
A bank sometimes runs short on cash; for example, a bank can experience an unexpected demand and may be unable to convert its assets into cash quickly enough. In such a situation, the bank may be able to borrow the cash from other banks. The obligation to repay the lender is then recorded as a bill payable. Accounts payable, on the other hand, do not include such an obligation.
Accountants in the U.S. more commonly use the term "accounts payable" even when they can replace it with "bills payable." In the case of the promissory notes, "bills payable" can also be replaced by "notes payable." The term "bills payable" used to enjoy more popularity, but its use among American accountants has declined over time. Accountants in the U.K. use "bills payable" more frequently than their American counterparts, according to Accounting Tools.