What it means
When a supplier wants more certainty than an open invoice provides, it may draw a bill of exchange on its customer. Once the customer signs to accept it, the amount moves out of trade payables and into bills payable, because the obligation has become a negotiable instrument.
That reclassification changes the customer's position more than it first appears. The supplier can sell or discount the accepted bill to a bank, so the business may end up owing a financial institution rather than the supplier it originally dealt with.
Bills payable often carry explicit interest, which ordinary invoices usually do not. That makes the cost of the credit visible, and it means the finance team must accrue the interest across the period rather than recognising all of it at settlement.
Presentation depends on timing. Bills maturing within twelve months are current liabilities while longer dated instruments sit in non-current liabilities, and that split feeds directly into working capital and current ratio calculations.
The real risk is rigidity. A late invoice usually leads to a phone call, whereas a dishonoured bill is a formal default that can damage a credit rating, trigger clauses in other loan agreements and make future trade credit harder to obtain.
In practice
Real-world examples.
Example
A textile importer accepts a $180,000 bill payable at 60 days to secure a shipment from a supplier unwilling to offer open credit. The amount is disclosed separately from trade payables so the company's bank can see how much of its short term debt is formal.
Example
A construction firm settles a $95,000 equipment invoice by issuing a promissory note repayable in three instalments over nine months. The note appears within bills payable and the interest is accrued monthly rather than charged all at once.
Example
A distributor's balance sheet shows $260,000 of trade payables and $340,000 of bills payable. An analyst reads that mix as a signal that suppliers have tightened terms and now want formal instruments instead of open account trading.
Formula
Calculation
Interest on a bill payable = face value x annual rate x (days to maturity / 360)
Total settlement = face value + interest
A wholesaler accepts a bill payable of $180,000 to settle an overdue invoice, due in 60 days and carrying interest at 9% a year on a 360 day basis. The interest is $180,000 x 0.09 x (60 / 360) = $180,000 x 0.015 = $2,700, so the wholesaler must pay $180,000 + $2,700 = $182,700 on the maturity date.
The number only means something next to the alternative. If the supplier's original invoice offered 2% off for settlement within ten days, the discount given up is $180,000 x 0.02 = $3,600, which is more than the $2,700 of interest, so on these figures the bill is the cheaper way of buying the extra time.Case study
Seen in the real world.
The following is an illustrative and fictional case. Wenlock Timber, an invented builders merchant, was short of cash and persuaded its two largest suppliers to convert $640,000 of overdue invoices into bills payable at 10% a year, maturing in 90 days.
The arithmetic looked manageable at the time. Interest of $640,000 x 0.10 x (90 / 360) = $16,000 bought three months of breathing space, which the managing director judged cheap against the alternative of losing supply altogether.
What had not been weighed was what happened at maturity. When trading failed to recover, both bills fell due on the same day for $640,000 + $16,000 = $656,000, there was none of the room to negotiate that ordinary invoices would have allowed, and the fictional company had to take an expensive short term loan to avoid dishonouring them.
Watch out
Common mistakes.
- Lumping bills payable in with trade payables, which hides the fact that part of the balance is formal debt with a fixed maturity date.
- Ignoring the interest, so the true cost of stretching payment is never compared with an overdraft or with an early settlement discount.
- Treating a bill's maturity date as flexible, when dishonouring it is a formal default rather than an ordinary late payment.
Questions
People also ask.
What is the difference between bills payable and accounts payable?
Accounts payable are ordinary invoices on open credit, while bills payable are amounts owed under signed instruments such as accepted bills of exchange or promissory notes.
Are bills payable current or non-current liabilities?
Those maturing within twelve months are current and anything longer is non-current, so one company can report both at the same time.
Why would a business agree to issue a bill payable?
Usually to obtain or extend credit from a supplier who wants a stronger, tradeable claim than an ordinary invoice provides.
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