What is the difference between Notes Payable and Accounts Payable?

When you pay the first quarterly interest expense, you’ll make the following entry, which should be paid at the end of the quarter. The above entry ensures that the travel expense is posted in June, when it occurred, not in the month that the invoice was paid. He draws from his studies of economics and multiple is notes payable the same as accounts payable years of bookkeeping experience where he helped businesses understand and measure their financial health. They outline how your cash will be allocated so that you can accomplish your financial goals. See how forward-thinking finance teams are future-proofing their organizations through AP automation.

Managing Vendors and Suppliers

With a platform like Airbase, you eliminate the manual data entry, recording, and reconciling that makes payable management such a hassle. Both accounts payable and notes payable are obligations — money the company owes. Notes payable is a ledger liability account where an organization records the face value of its promissory notes. A long-term notes payable agreement helps businesses access needed capital attached to longer repayment terms (12–30 months).

Example of a Note Payable

• Companies with a high DPO, taking longer to pay their invoices, can use the extra cash on hand for early payment discounts or other short-term investments.
• A good company will always manage and hold a decent amount of working capital to run the day-to-day business operations.
• Notes payable and accounts payable are both liability accounts that deal with borrowed funds.

They’re typically short-term liabilities the company will pay off in under a year. Make sure that all notes payable are accurately recorded on the balance sheet, as they are a major indicator of a company’s financial position. Prioritize repaying notes with the highest interest rates first to minimize overall interest expenses and free up cash for other investments or operational needs. The cost of borrowing money through notes payable quickly adds up and impacts a company’s profitability. That’s why proper notes payable management is critical to maintain cash flow and avoid penalties, particularly for companies that rely heavily on external financing. In other words, notes payable are regular payments for loan agreements from credit companies, banks, and other financial institutions.

Look to Automation to Further Streamline the P2P Process

Accounts payable are the outstanding invoices or purchases made on credit owed to vendors and suppliers. Accounts payable is also responsible for managing employee reimbursements for travel expenses, petty cash, and other requests. Automated solutions can assist accounts payable to streamline and simplify the processing of these payments as well. The account Notes Payable is a liability account in which a borrower’s written promise to pay a lender is recorded. (The lender record’s the borrower’s written promise in Notes Receivable.) Generally, the written note specifies the principal amount, the date due, and the interest to be paid. Let’s consider an example of accounts payable in a typical business scenario.

Many business owners and managers assume accounts payable and notes payable are interchangeable terms, but they are not. Keeping accurate logs of expenses and owed payments of all kinds is important to any business’s spend management process, as well as their specific spend management strategy. A smooth accounts payable process helps organizations keep track of invoices, avoid late payments and fees, and fulfill their short term obligations. Both accounts payable and notes payable are considered liabilities in a company’s financial statements. They represent a company’s obligations to its suppliers, vendors, or creditors, which need to be settled through payments.

For account payable, that complexity will grow with the volume of business. As revenues grow, so will the need for additional resources to pay suppliers and creditors in an accurate and timely manner. At some point, an organization will require the structure of an accounts payable department. In some organizations, supplier management is the responsibility of procurement; in others, it is the responsibility of accounts payable. Regardless of which team oversees the process, another essential task is the maintenance of the master vendor file. Procurement and AP teams must work closely together to ensure that orders, and payments, go to the right suppliers, sent to their current bank account or business location.

Promissory notes usually specify a given maturity date, interest rate, and any collateral. For example, a business might issue notes to purchase a new property or an expensive piece of equipment. Here we provide you with the top 7 differences between Accounts Payable vs. Notes Payable. This is in the form of infographics which help in identifying and remembering the differences easily in the form of a chart.

GEP representatives may contact you to provide additional information or answer questions. Take a forward step into 2024 by embracing the advantages of AP process automation. Join our community to get finance, operations, and procurement resources straight to your inbox. Download the financial projections template to clarify financial patterns, track spending throughout the year, and make better-informed decisions about the future. Your financial statements contain a wealth of information that helps you get the lay of the land, plan ahead, and forecast the future. Discover the next generation of strategies and solutions to streamline, simplify, and transform finance operations.

For accounts payable, automation takes advantage of early payment discounts and frees up working capital by extending payment terms when necessary. They are documented liabilities that usually involve a written agreement to pay a specific amount of money by a certain date — with interest. That’s where automated document matching becomes a valuable tool for account payable. This often starts with a purchase order, a purchasing best practice where authentication occurs on the front end before an order is sent, not after the fact of a purchase. Adding this requirement for purchasing eliminates the burden on accounts payable to validate an invoice. The invoice is linked to a purchase order, automatically matched, and immediately approved for payment.

Let’s now look at the head-to-head differences between Accounts Payable vs. Notes Payable.

This presents an opportunity to extend payment terms with their suppliers, and introduce an early payment discount program to support suppliers who would like to be paid sooner. For preferred suppliers in certain categories of business spend, supplier management could extend to catalogs that employees order from, to make sure that all products and pricing are current and accurate. If a company borrows money from its bank, the bank will require the company’s officers to sign a formal loan agreement before the bank provides the money.