Commercial entities operating for profit incur various expenses during the course of their operations. These may be in the nature of purchase of goods or consumption of a variety of services. In commercial arrangements, there is often a time lag between the consumption of goods or services and the payment that is to be made for them. This is the credit period that the suppliers extend to their customers. These credit transactions result in payables balance being generated in the books of the customers and can be settled through different means such as paying cash, issuing checks, drafts or promissory notes and accepting bills of exchange drawn by the suppliers and sellers etc.

This article looks at meaning of and differences between two legs of the payment cycle in a customer’s books – bills payable and accounts payable.

Definitions and meanings

Bills payable:

A bill payable is a document typically know as bill of exchange. It indicates dues payable by a party (e.g., a buyer, customer or debtor etc.) of the amount contained therein. When a transaction of purchase of goods or services is concluded but not paid for, the supplier or seller draws a bill of exchange on the buyer or customer indicating a certain amount due along with the date on which it is due. Once the customer accepts this bill, it becomes a bill payable for him. A bill payable for a customer is also a bill receivable for the seller. Once accepted by the customer, a bill payable essentially serves as an undertaking by the customer to pay the specified amount by the specified maturity date to the holder of the bill.

On maturity date, the holder of the bill presents it to the drawee. The holder may be the original drawer of the bill or any other entity or bank to whom the seller has transferred the bill or with whom he has discounted the bill. If the drawee makes the required payment against the bill on due date, the bill is known as an honored bill and the liability is extinguished. If, on the other hand, the payment is not made on maturity, the bill becomes a dishonored bill and the liability is not extinguished. In such a circumstance, the drawee is responsible for any noting charges or fee incurred as a result of the dishonor of bill payable.


XYZ Inc. purchases goods amounting to $40,000 from ABC Inc. As per terms of the purchase, ABC Inc. draws a bill of exchange for the amount of $40,000, payable after 2 months on XYZ Inc. XYZ Inc. accepts the bill which now becomes a bill payable for him.

The possible journal entries in the books of XYZ Inc. are as follows:

Acceptance of bill by XYZ Inc:

Accounts payable a/c…..40,000 [Dr]
Bills payable…..40,000 [Cr]
(Being bill payable drawn by ABC Inc. for the balance due, duly accepted)

Honoring of bill by XYZ Inc. on maturity:

Bills payable a/c…..40,000 [Dr]
Bank a/c…..40,000 [Cr]
(Being payment made to ABC Inc. against a bill payable)

In case of dishonor of bill by XYZ Inc:

Bills payable a/c…..40,000 [Dr]
Accounts payable…..40,000 [Cr]
(Being bill payable dishonored; balance due to ABC Inc. re-transferred to accounts payable)

Accounts payable:

Accounts payable represent the balance that is outstanding, to be paid by a customer to its seller/supplier. Accounts payable is a liability account in the books of a customer. When a credit purchase of goods or services takes place, the buyer or customer will receive an invoice for the same from the seller. Recording of this invoice in the books of the customer creates an accounts payable balance in favor of the seller.


Continuing the same example as above, suppose, ABC Inc. (the seller) does not draw a bill on XYZ Inc. (the buyer) but simply allows him a credit period of 2 months to make the payment. In the books of XYZ Inc., the journal entry needed at the time of creation of accounts payable liability and at the time of payment to ABC Inc. would be made as follows:

Creation of accounts payable:

Purchases a/c…..40,000 [Dr]
Accounts payable a/c …..40,000 [Cr]
(Being credit purchases from ABC Inc. recorded)

Payment of balance due:

Accounts payable a/c…..40,000 [Dr]
Bank a/c…..40,000 [Cr]
(Being accounts payable balance of ABC Inc. settled)

Accounts payable balance would be reported under current liabilities in the balance sheet of the buyer – XYZ Inc. in our example.

Difference between bills payable and accounts payable

The seven key points of difference between bills payable and accounts payable are as follows:

1. Meaning

  • Bill payable is a bill of exchange that acknowledges indebtedness of a specified amount to the holder by the drawee (customer), due on the specified maturity date.
  • Accounts payable is a current liability in the books of a customer that indicates the amount outstanding, as payment by the customer to a seller.

2. Maturity

  • A bill payable is a physical bill of exchange document that specifies a fixed and pre-determined maturity date.
  • Accounts payable is an account balance that is outstanding. Its maturity can be approximated on the basis of credit period received but it usually does not have any strict maturity date.

3. Basis

  • A bill payable results from acceptance by a customer of dues to a seller, payable on a specific date. It arises on account of an underlying accounts payable balance.
  • An accounts payable is created on receipt of invoice by the customer for a goods purchase or service receipt transaction.

4. Statutory coverage

  • Operation of bill payable is covered by jurisdictional laws governing negotiable instruments.
  • Whereas operation of accounts payable is covered by jurisdictional laws covering general contracts.

5. Subset of

  • All bills payable form part of legally enforceable debt represented by accounts payable balances.
  • All accounts payables however need not be represented by commensurate bills payables.

6. Disclosure in financial statements

  • Bills payables are generally recorded in a separate subsidiary book known as bills payable book. The sum of all bills payable accepted is subsequently disclosed as current or non-current liabilities in the customer’s books, depending on their term to maturity.
  • Accounts payable represent current account transactions and are thus reported as current liabilities in the customer’s balance sheet.

7. Impact of non-payment

  • In case a bill payable is dishonored by the customer, it is reversed in the books and the accounts payable balance is re-instated. The defaulting customer also becomes liable to pay any noting fees or other charges that have arisen on account of dishonor of the bills payable.
  • In case an accounts payable balance is not paid due to dispute or inadequate funds, it must be written back in the books of the customer for the liability to be extinguished. Commensurate legal action as stipulated in the agreed terms between both parties may follow.

Conclusion – bills payable vs accounts payable

Both bills payable and accounts payable represent outstanding dues for an entity. Entities must maintain proper track of their payables as they are legally enforceable against them by their creditors. If they do not honor the payments due on their bills payable and accounts payable in a timely manner, they may face legal action from their creditors. Additionally, the defaulting entity may lose the trust in the eyes of his vendors who may stop the delivery of inputs and supplies. This makes it extremely important to manage payables and ensure payments are cleared in a timely manner.