The primary difference between Accounts Payable vs. Notes Payable is that the former is the amount owed by the company to its supplier when any goods are purchased or services are availed, whereas the latter is the written promise for giving a specific sum of money at a specified future date or as per the demand of the holder of the received note.
Difference Between Accounts Payable vs. Notes Payable
Short-term liabilities are every business’ financial obligations to maintain proper and sustainable working capital management. A good company will always manage and hold 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 analyzed in-depth and individually.
In this article, we have shown accounts payable vs. notes payable in detail.
Accounts Payable vs. Notes Payable – Infographics
Here we provide you with the top 7 differences 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 classified as current liabilities. They generally do not involve any written agreement of a payment made within a specified period. On the other hand, 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. are written promissory notes that a company receives when it borrows money from a lender, generally financial institutions and 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 credit company furnishes the funds. However, there is generally no obligation or a fixed payment term in accounts payables that the company needs to follow to make payments.
- Accounts payables are not formal written agreements, and most of the time, it is a verbal agreement between the two parties. On the contrary, notes payables are always a legal and written agreement.
- Accounts payables are generally due to suppliers or subcontractors, and therefore there is no legal interest on the instrument and no fixed obligation to pay. Under notes payables, the instrument always bears a certain percentage of interest 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 non-current liability.
- Notes payable are a loan that bears the payment terms, maturity dates, etc. On the other hand, accounts payables are an informal channel due to the vendors and the suppliers, making the payment more flexible and without formal or written agreement.
Accounts Payable vs. Notes Payable – Head to Head Difference
Let’s now look at the head-to-head differences 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|
|Always converted into notes payables.||Never converted into account payables.|
|The amount is generally due to vendors and suppliers.||The amount due to the financial institutions and the credit companies.|
|It is created in the case of low-risk customers. A low-risk customer can be given money because of their good credit history and creditworthiness.||It is created in the case of high-risk customers. A high-risk customer should be given money only when they fulfill 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 vital for calculating working capital and working capital management.||It can be or cannot be taken to calculate working capitalCalculation Of Working CapitalWorking capital is the amount available to a company for day-to-day expenses. It's a measure of a company's liquidity, efficiency, and financial health, and it's calculated using a simple formula: "current assets (accounts receivables, cash, inventories of unfinished goods and raw materials) MINUS current liabilities (accounts payable, debt due in one year)".|
|It originates from the purchase of tradable items or inventories.||It may evolve in purchasing long-lived assets or borrowing to satisfy the existing obligations.|
Both accounts payables and notes payables are 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. and other short-term obligations, making the management of these two short-term obligations essential for a company to run its day-to-day business. Accounts payables and notes payables are like debt categorized under both current and non-current liabilities. Current liabilities like notes and accounts payables need to be managed 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..
Businesses need to employ specific processes to successfully manage their current obligations to succeed in the long run.
This article has been a guide to Accounts Payable vs. Notes Payable. Here we discuss the top difference between Accounts Payable vs. Notes Payable along with infographics and a comparison table. You may also have a look at the following articles: –