What is the Difference between Accounts Payable and Notes Payable

In the world of business, it is a reality that businesses, whether SMEs or big corporations, sometimes do not have enough resources to purchase goods that they obtain these resources through borrowing, owners’ investments, and management operations. These are extended to them by persons or banks, financing companies, and suppliers, and are referred to as payables, liabilities or debt.

In accounting, there are two types of payables, accounts payable and notes payable, and these are reported on a balance sheet as current (short-term) or long-term, based on when they are due to be paid. These payables must be paid within a specific period of time, usually within 12 months or longer.

Here are the points of difference between the accounts payable and notes payable:

Accounts Payable

Accounts payable are short-term financial obligations that exist based on the good faith credit of the business or owner. Other than an invoice, these payables do not involve any signed written formal note or agreement to pay within a specific period of time.

Often shorthanded as A/P, Accounts payable arises in the normal course of business when an individual or business receives a product or service before it pays for it. This form of credit that suppliers offer to their customers usually require repayment on specific due dates, usually within 30 days, but do often run past 30 days or 60 days in some situations.

Oftentimes, there are businesses that enable their customers to purchase supplies, commodities or services on an account on credit. In accounts payable, this is true for clients that have been patronizing their products or business for a while and they are already proven to be of good credit risks.

For practical purposes, the major difference between notes payable and accounts payable is that accounts payable are not charged with any interest fees or other charges if they are paid on time. If accounts payable are paid late, however, it is common for an interest charge to be added to the accounts payable payment required.

Accounts payable is one of the largest current liabilities a company will face. This is because they are constantly ordering new products or paying vendors for services or merchandise.

The timing of payments of accounts payable balances are determined by the credit terms of each transaction and the company’s ability to take advantage of available discounts.

Examples of accounts payable are amounts due to vendors such as for rent and utilities and from purchases of merchandise or supplies on an account.

In households, examples of accounts payable are ordinarily bills from the electric company, telephone company, cable television or satellite dish service, newspaper subscription, and other such regular services.

Notes Payable

Notes payable represents either short-term or long-term financial obligations to banks or other creditors based on formal written agreements. It involves a written promissory note that a company receives when it borrows money from a lender. This note promises to pay specified dollar amounts that include the amount borrowed, called principal, and interest within a specific period of time. In the agreement, a specific interest rate is usually identified. This specific interest rate and the terms are stated in the promissory note.

Notes payable are usually offered by financial institutions such as banks and financing or credit companies to individuals or businesses wanting to purchase something but do not have enough cash. They come in the form of loans, mortgages, and financing.

Notes payable usually result from companies buying merchandise or property, plant, and equipment or in exchange for cash, goods, services, or other commodities.

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