The primary difference between Accounts Payable vs Notes Payable is that Accounts payable is the amount owed by the company to its supplier when any goods are purchased or services are availed whereas notes payable is the written promise for giving a specific sum of money at a specified future date or as per the demand of holder of the note.
Difference Between Accounts Payable vs. Notes Payable
Short-term liabilities are the financial obligations that every business has in order to maintain a proper and sustainable working capital management. A good business will always manage and maintain a decent amount of working capital to run the day-to-day business operations. Accounts payables and notes payable are often used interchangeably. They are a part of current liabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc. on the balance sheet, but there is a slight difference when they are both analyzed in-depth and individually.
In this article, we look at accounts payable vs. notes payable in detail.
Accounts Payable vs. Notes Payable – Infographics
Here we provide you with the top 7 difference between Accounts Payable vs. Notes Payable.
Accounts Payable vs. Notes Payable – Key Differences
The critical differences between Accounts Payable vs. Notes Payable are as follows –
- Accounts payablesAccounts PayablesAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period. are basic financial obligations of a business which are classified as current liabilities. They generally do not involve any written agreement of a payment to be made within a specified period. Notes payablesNotes PayablesNotes Payable is a promissory note that records the borrower's written promise to the lender for paying up a certain amount, with interest, by a specified date. , on the other hand, are known as written promissory notes that a company receives when it borrows money from a lender, which are generally financial institutions and additional financing or credit companies.
- A significant difference between notes payables and accounts payable is that under notes payables, the payment terms and the mode are fixed once the lending agreement is done. The funds are furnished by the credit company, although in accounts payables, there is generally no obligation or a fixed payment term that the company needs to adhere to in order to make payments.
- Accounts payables are not formal written agreements, and most of the time, it is a verbal agreement that takes place between the two parties. On the contrary, notes payables are always a formal and written agreement.
- Accounts payables are generally due to suppliers or subcontractors, and therefore there is no formal interest on the instrument and no fixed obligation to pay. Under notes payables, the instrument always bears a certain percentage of interest, which is due every month or according to payment terms, which are decided and agreed upon initially.
- Accounts payables are always a short-term obligation and are a current liability; on the other hand, notes payables can be either current or a non-current liability.
- Notes payable is basically in the form of a loan which bears the payment terms, maturity dates, etc. on the other hand accounts payables is an informal channel which is due to the vendors and the suppliers, which makes the payment more flexible and which no formal or written agreement.
Accounts Payable vs. Notes Payable – Head to Head Difference
Let’s now look at the head to head difference between Accounts Payable vs. Notes Payable.
|Accounts Payables||Notes Payables|
|Always a short-term obligation to the business||Can be a short-term or long-term obligation to the business|
|Accounts payables can always be converted into notes payables.||Notes payables can never be converted into account payables.|
|The amount is generally due to the vendors and the suppliers of the company.||Notes payables are the amount which is due to the financial institutions and the credit companies.|
|It is created in the case of low-risk customers. A customer who has low risk can be given money because of its good credit history and creditworthiness.||It is created in the case of high-risk customers. A high-risk customer should be given money only and when it fulfills certain obligations.|
|There are no specific terms under accounts payables and no specific payment obligation to the creditors.||There is a specific payment term such as maturity period, interest rate, clauses for non-payment, etc.|
|It is a vital competent for the calculation of the working capital and working capital management.||It can be or cannot be taken in the calculation of working capital.|
|It originates from the purchase of tradable items or inventories.||It may also evolve in case of the purchase of long-lived assets or borrowing or to satisfy the existing obligations.|
Both accounts payables and notes payables are both a vital component for working capitalComponent For Working CapitalMajor components of working capital are its current assets and current liabilities, and the difference between them makes up the working capital of a business. The efficient management of these components ensures the company's profitability and provides the smooth running of the business. management and other company short-term obligations, which makes the management of these two short-term obligations essential for a company to run their day-to-day business. Accounts payables and notes payables are like a form of debt that can be categorized under both current and non-current liabilities. For efficient working capital managementWorking Capital ManagementWorking Capital Management refers to the management of the capital that the company requires for financing its daily business operations. It is important for the company in order to maximize its operational efficiency, manage its short term liabilities and assets properly, avoiding the underutilization of the resources and avoiding the overtrading, etc., current liabilities like notes payables and accounts payables need to be managed efficiently.
Businesses need to employ specific processes in order to successfully manage their current obligations if they want to succeed in the long-run.
This article has been a guide to the Accounts Payable vs. Notes Payable. Here we discuss the top difference between Accounts Payable vs. Notes Payable along with infographics and comparison table. You may also have a look at the following articles –