In financial accounting terminology, what is the difference between Accounts Payable and Bills Payable?

Introduction / Context:
Accounts Payable and Bills Payable are related but not identical terms in accounting. Many interviewers ask this question to check whether candidates can distinguish between simple trade credit and more formal written obligations.

Given Data / Assumptions:
- We are dealing with liabilities that arise from purchasing goods or services on credit.
- Some obligations are based only on invoices and supplier agreements, while others are formalised through negotiable instruments such as bills of exchange or promissory notes.
- The aim is to contrast the nature of these liabilities and their presentation in the books.

Concept / Approach:
Accounts Payable usually refers to amounts owed to suppliers on ordinary open account, based on invoices but without separate negotiable instruments. Bills Payable refers to written promises to pay a specified sum on a specified date, embodied in instruments like accepted bills of exchange or promissory notes. These instruments can sometimes be endorsed or discounted, which gives Bills Payable a slightly different legal status compared to simple trade payables.

Step-by-Step Solution:
Step 1: Define Accounts Payable as the balance due to suppliers for credit purchases where no formal bill or note has been issued.
Step 2: Define Bills Payable as a liability arising when the business accepts a bill of exchange or issues a promissory note in favour of a creditor.
Step 3: Recognise that both are liabilities, but Bills Payable are documented through negotiable instruments, which may have different legal and collection procedures.
Step 4: Identify the option that clearly captures this difference in nature and documentation.

Verification / Alternative check:
In many balance sheets, Accounts Payable and Bills Payable are shown separately within current liabilities. This separation reflects the difference between open trade creditors and liabilities based on formal instruments. Seeing this separation in financial statements supports the conceptual distinction explained above.

Why Other Options Are Wrong:
Option A is wrong because it denies any difference between the terms, which is not accurate in standard accounting usage. Option C misclassifies Accounts Payable as related to employees and Bills Payable as related to customers, which is incorrect. Option D suggests a fixed rule on term, but in practice both Accounts Payable and Bills Payable are usually current liabilities due within a short period; the key difference is form, not just maturity.

Common Pitfalls:
Some learners use Accounts Payable and Bills Payable loosely as if they were interchangeable, which can create confusion when reading financial statements. Others assume Bills Payable exist only in theory, but many businesses still use bills of exchange or promissory notes, especially in trade finance. Being precise with terminology shows deeper understanding in an interview setting.

Final Answer:
Correct option: Accounts Payable is the general ledger balance for trade creditors on open account, while Bills Payable are formal written promises such as bills of exchange or promissory notes issued to creditors.