Notes Payable vs Accounts Payable
Individuals and businesses sometimes do not have enough resources to purchase goods that they need so they have to do it on credit. These are extended to them by banks, financing companies, and suppliers, and are referred to as “payables.” There are two types of payables; accounts payable and notes payable.
Accounts payable are short-term financial obligations that are based on good faith. Other than an invoice, they do not involve any written agreement to pay within a specific period of time. They are also not charged with any interest fees or other charges, and they usually require repayment within 30 days or less.
Oftentimes, businesses allow clients to purchase supplies or commodities on an account. This is true for clients that have been patronizing their products or business for a while and are already proven to be good credit risks.
Notes payable, on the other hand, are either short-term or long-term financial obligations that require a written promise to pay within a specific period of time. These notes are written in exchange for cash, goods, services, or other commodities. They are usually offered by financial institutions such as banks and financing or credit companies to people who want to purchase something but do not have enough cash. They come in the form of loans, mortgages, and financing.
When a bank or a financial institution issues notes payable, a contract must be signed by the borrower stating specific terms such as interest rates and payments, service charges, monthly amortization, and the time that the debt is due.
Delayed payments for an account payable can lead creditors to require debtors to sign an agreement to pay the account. It will then accrue interest and have a due date. The account will then be transferred from accounts payable to notes payable. For example, if you are a retailer and order goods from a manufacturer, the goods will be delivered to your store with an invoice that may state that it is payable in one month. No contract is needed then. Only the manufacturer’s faith in your good credit is involved.
If you renege on your obligation and fail to pay the account on the date specified on the invoice, the manufacturer may opt to require you to sign an agreement to pay. In return, you are allowed an extension of the payment period.
Summary:
1.An accounts payable is a liability that is short term, usually between two weeks and one month, while notes payable is a liability that has a longer term, the shortest of which is six months.
2.Accounts payable is based on good faith and requires no written agreement other than a sales invoice while notes payable requires a written contract which must be signed by the debtor and which states the terms of the account.
3.Accounts payable is not charged with interest or other fees while notes payable have a specific interest rate and service charges.
4.Notes payable are usually offered by banks and other financial institutions while accounts payable are offered by suppliers of goods and services.