What is the Difference Between Account Payable and Note Payable?
🆚 Go to Comparative Table 🆚The main difference between accounts payable and notes payable lies in their nature, duration, and payment terms. Here are the key differences between the two:
- Nature of obligation: Accounts payable refers to short-term liability accounts incurred for purchases with vendors and suppliers on credit, while notes payable are long-term liability accounts incurred through financing by banks and other lending institutions.
- Duration: Accounts payable is always a short-term liability, whereas notes payable can be either short-term or long-term.
- Payment terms: Accounts payable involves recording and processing supplier invoices with trade credit terms, whereas notes payable are written contracts that typically serve the purpose of obtaining financing.
- Formality of agreement: Accounts payable generally involves informal verbal agreements, while notes payable are always written, formal agreements.
In summary, accounts payable represents money owed to vendors and suppliers for goods or services purchased on credit, and it is considered a short-term liability. On the other hand, notes payable involve formal contracts between a borrower and a lender, usually involving loans with specific principal and interest components, and can be short-term or long-term in nature.
Comparative Table: Account Payable vs Note Payable
The main difference between accounts payable and notes payable lies in their nature, terms, and obligations. Here is a table summarizing their key differences:
| Feature | Accounts Payable | Notes Payable |
|---|---|---|
| Definition | Accounts payable refers to the money owed by a company to its suppliers for goods or services purchased. | Notes payable are written promissory notes that record the borrower's written promise to repay a loan, along with interest, by a specified date. |
| Formality | Accounts payable are generally informal verbal agreements, rather than formal contracts. | Notes payable are always written, formal agreements. |
| Payment Terms | Accounts payable have payment terms associated with them, such as 30, 60, or 90 days. | Notes payable involve the payment of principal and interest, and are generally longer-term payment commitments. |
| Interest | There is no interest payment associated with accounts payable. Some suppliers may assess late payment penalties if payments are not made by the invoice due date, but interest is not a common feature. | Notes payable often involve interest payments, as they are a form of borrowing or debt. |
| Time Frame | Accounts payable are short-term liabilities, typically due within a year. | Notes payable can be short-term or long-term liabilities, depending on the terms of the promissory note. |
| Balance Sheet | Accounts payable is treated as a current liability in the balance sheet of the entity. | Notes payable is listed on the balance sheet as a part of the company's liabilities, with short-term notes payable listed as current liabilities and long-term notes payable listed as non-current liabilities. |
| Source | Accounts payable arises from the purchase of goods or services from suppliers. | Notes payable arise from borrowing money from financial institutions or other creditors. |
Both accounts payable and notes payable are important aspects of a company's financial management, and understanding their differences is crucial for maintaining accurate records and making timely payments.
- Accounts Receivable vs Notes Receivable
- Accounts Payable vs Accounts Receivable
- Accrued Expense vs Accounts Payable
- Credit Note vs Debit Note
- Note vs Notice
- Treasury Bills vs Notes
- Invoice vs Bill
- APR vs Note Rate
- Cheque vs Promissory Note
- Invoice vs Purchase Order
- Credit Sales vs Accounts Receivable
- Bookkeeping vs Accounting
- Cash Accounting vs Accrual Accounting
- Invoice vs Statement
- Receipt vs Invoice
- Cash vs Accrual (Accounting)
- Accruals vs Prepayments
- Factoring vs Accounts Receivable Financing
- Balance Sheet vs Cash Flow Statement