Accounts payable (AP) and notes payable (NP) are often used interchangeably, but in reality, they operate differently and serve distinct purposes within your financial strategy.
To properly manage either payable category, granular spend visibility is essential. Without it, the benefit of strategic financing can be diminished or even become a vector for financial risk.
We will define and contrast accounts payable and notes payable and illustrate how financing strategies offer maximum growth opportunities when paired with a dynamic procurement management tool. First, let’s get a clearer understanding of the differences between AP and NP.
As a business owner or finance manager, you likely deal with notes payable and accounts payable as part of your company’s financial management. But what exactly is the difference between these two types of liabilities?
In this article, we’ll break down the key differences between notes payable and accounts payable to help demystify these crucial finance terms
A Quick Definition
First let’s start with a simple definition of each
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Accounts payable refers to money owed by a company to its suppliers or vendors. Accounts payable are essentially purchase orders that have been fulfilled but not yet paid for.
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Notes payable are formal promissory notes documenting money that a company borrows. This includes loans bonds and lines of credit.
So in short:
- Accounts payable = money owed to suppliers
- Notes payable = money borrowed from lenders
Now let’s explore some key differences in more detail.
Key Differences Between Accounts Payable and Notes Payable
While both accounts payable and notes payable represent financial obligations, there are some important distinctions between the two.
1. Source of the Liability
The source of the liability differs between accounts payable and notes payable.
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Accounts payable represent money owed to suppliers and vendors. The source of the liability is the receipt of goods or services.
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Notes payable represent money borrowed from financial institutions or creditors. The source of the liability is the receipt of loaned funds.
2. Nature of the Agreement
The nature of the agreement also differs.
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Accounts payable typically stem from informal purchase orders or invoices. There is often no signed contract.
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Notes payable stem from formal loan agreements or promissory notes that are signed by both parties.
3. Interest and Fees
Another key difference lies in interest and fees.
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Accounts payable usually don’t involve interest or fees (although late fees can sometimes apply).
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Notes payable often involve paying interest and fees to the lender, as outlined in the loan agreement.
4. Time Frame for Payment
The expected time frame for payment is also different.
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Accounts payable are typically due within 30, 60, or 90 days of receiving the invoice.
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Notes payable usually have payment terms greater than 90 days or 12 months, with monthly payments until the note matures.
5. Impact on Financial Statements
Finally, accounts payable and notes payable appear differently on financial statements.
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Accounts payable are always current liabilities on the balance sheet.
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Notes payable can be current liabilities or long-term liabilities depending on the payment terms.
Real World Examples
Let’s look at some real world examples to reinforce the differences:
Accounts Payable Example
- A retailer orders $5,000 worth of inventory from a wholesale supplier.
- The retailer receives the inventory and the supplier invoices them for $5,000 due in 60 days.
- The $5,000 accounts payable liability appears on the retailer’s balance sheet until they pay the supplier.
Notes Payable Example
- A software startup secures a $100,000 small business loan from a bank to fund product development.
- The startup signs a 5-year loan agreement with 7% interest paid monthly.
- The software company records the $100,000 notes payable liability on their balance sheet and makes interest + principal payments monthly.
Why the Distinction Matters
As you can see, the distinction between accounts payable and notes payable is important for a few reasons:
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It impacts the source of the liability, the nature of the agreement, interest/fees, payment terms, and financial reporting.
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Mishandling or misreporting accounts payable or notes payable could raise red flags for lenders or investors.
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As a business grows, managing accounts payable and notes payable requires different processes and oversight.
Clearly defining and differentiating between these two terms will save headaches down the road!
Best Practices for Managing Accounts Payable and Notes Payable
Here are some tips for effectively managing your company’s accounts payable and notes payable:
For Accounts Payable:
- Establish clear, consistent payment terms with suppliers
- Institute approval workflows for purchases and payments
- Take discounts where offered for early payment
- Automate invoice processing and payments
- Maintain proper records for accounting and reporting
For Notes Payable:
- Read loan agreements carefully and ensure compliance
- Set up reminders for monthly interest/principal payments
- Avoid late fees or nonpayment penalties
- Refinance debt obligations if better terms are available
- Keep detailed amortization schedules for balance tracking
Proactively managing accounts payable and notes payable reduces risk, optimizes cash flow, maintains good supplier and lender relationships, and ultimately supports the overall financial health of your company.
Key Takeaways
- Accounts payable represent money owed to suppliers while notes payable represent borrowed funds.
- Key differences include the source, agreement terms, interest, payment timeline, and financial statement treatment.
- Proper tracking, reporting, and timely payment of accounts and notes payable is essential for businesses.
Hopefully this overview has helped eliminate any confusion between accounts payable vs notes payable. Managing both effectively will keep your finances in order!
Accounts payable and notes payable defined
Accounts payable and notes payable are liabilities recorded as journal entries in a general ledger (GL) and on the company’s balance sheet.
Accounts payable refers to short-term liability accounts incurred for purchases with vendors and suppliers on credit. Notes payable are long-term liability accounts incurred through financing by banks and other lending institutions. Many business owners and managers assume accounts payable and notes payable are interchangeable terms, but they are not.
Let’s look more closely at the differences:
- Short-term debt resulting from purchasing goods and services. These credit purchases are due for repayment within a year or less. (In practice, most suppliers seek Net 30 repayment terms.)
- Purchases do not incur interest within the repayment period and discounts may be offered for early payment.
- These short-term loans are non-collateralized. As long as invoices are paid promptly, suppliers will continue to fulfill new orders.
- Longer-term obligations to vendors or lending institutions. They have specific terms and maturity periods of either one year or less (short-term) or more than one year (long-term).
- Backed by written promises to repay (called promissory notes) that outline payment terms. Notes include the principal amount issued by the lender, interest payable, payment interval, and security or collateral terms. These elements are encapsulated into a formal lending agreement between the borrower and lender.
- Notes payable are customarily funded by banks, but they may also be paid to other financial institutions.
- Specific due date and repayment schedule. Notes payable are recorded and reported differently from accounts payable.
Download the financial projections template to clarify financial patterns, track spending throughout the year, and make better-informed decisions about the future.
What are the benefits of long-term notes payable? (LTNP)
Leveraging financing can be an effective way of getting needed supplies and creating growth in the short term for companies that can generate revenue and adhere to repayment terms.
A long-term notes payable agreement helps businesses access needed capital attached to longer repayment terms (12–30 months).
- LNTP agreements are repaid with a set interest rate (like short-term notes payable).
- Long-term notes can be non-collateralized loans used for purchasing supplies or equipment. This gives businesses the funding they need without relinquishing any control over how those funds are used and without needing pre-approval from investors.
- Long-term notes payable provide the capital to invest in future growth, product development, and innovation, freeing up current assets for current operations.
- The LTNP is a low-risk financing option. It increases a company’s debt capacity and, therefore, displays deeper financial stability.
- Interest due can be deducted from the current year’s tax liability, lowering the overall cost of capital financing.
LTNP funding allows businesses to plan beyond day-to-day operations and fund innovation and growth. Using LTNP credit, you improve everyday control while building products and features to increase future revenue.
Notes Payable (Financial Accounting)
What is accounts payable?
Accounts payable is that money which the business has to pay back to its vendors or suppliers due to credit purchase of goods and services. There is no formal agreement and can be verified from invoices or bills. The invoices have details like the payment terms, due date, amount, etc. The business does not have to bear any interest in the same.
What is a notes payable account?
The borrower also includes a set amount of principal money and any interest in the note until the payment is complete. Notes payable keeps track of all promissory notes made by a company to vendors or lenders. This account acts as a liability account, so the company credits the notes payable account while it debits cash or another asset against it.
What is the difference between notes payable and notes payable?
It is typically used in a company’s day-to-day operations and appears as a short-term liability on the balance sheet. On the other hand, notes payable refers to a written promise made by a borrower to repay a lender a specific sum of money at a specified future date or upon the holder’s demand.
What are the different types of notes payable?
Notes Payable, however, can be classified into two types: Short-term Notes Payable: These have repayment terms of less than one year. They are often used for working capital needs or to finance seasonal operations. Long-term Notes Payable: These have repayment terms of more than one year.
