What Are Bills Payable? Definition and How It Works in Banking

What Are Bills Payable?

Bills payable refers to the short-term borrowing of banks from other banks, where the lender is often the country's central bank. Banks will borrow money from the central bank or other banks in order to maintain reserve requirements and adequate liquidity.

Bills payable is also a synonym for accounts payable, most often seen in the context of the U.K.

Key Takeaways

  • Bills payable consist of the money that a bank borrows, mainly on a short-term basis, and then owes to other banks.
  • Often, a commercial bank will borrow from the central bank for emergency liquidity or to meet minimum reserve requirements.
  • Bills payable is also a British term for accounts payable, which is a current liability on the balance sheet.

Understanding Bills Payable

In the context of banking, bills payable refers to a bank's indebtedness to other banks, usually to a central bank such as the Federal Reserve Bank in the U.S. These are short-term interbank loans that are backed by collateral consisting of the bank's promissory note and a pledge of government securities.

In other words, Banks borrow this money in order to maintain adequate liquidity levels. Banks are required to keep a certain amount of cash on hand (based on their loan portfolio) known as required reserves. These reserves function as a cushion to make sure that there is enough liquid cash on hand for depositors to withdraw. If there is not enough available cash, a bank run can ensue, causing the bank to go under unless emergency measures are taken.

In addition to borrowing from the central banks, banks can also borrow from other banks that happen to have excess reserves on a given day. Rather than sit on this extra cash idly, banks can lend these funds to those in need with interest. These loans (i.e., the bills payable) are then very short-term loans, often just overnight.

Bills Payable as Accounts Payable

In the context of personal finance and business accounting, bills payable may also refer to liabilities that are still outstanding, and so must be paid (such as utility bills or rent). These items are recorded as accounts payable (AP) and listed as current liabilities on a balance sheet.

Bills payable, then, can be contrasted with bills receivable (a.k.a., accounts receivable), which are the funds that are owed by others to the company but not yet paid.

A third, but less common definition of bills payable can refer specifically to short-term notes issued by a company in the form of a bill of exchange or trade acceptance. In either case, however, these items would normally be listed under a company's accounts payable.