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A liability is obligation companies accumulate from past transactions and events. This obligation creates an economic outflow of benefits in the future. Practically, liabilities may come in various forms for a company. Two of the two common ones include account and note payable. Both are similar in many aspects. However, they are fundamentally different in some ways.
What is an Account Payable?
An account payable is a balance representing money owed to suppliers from past transactions. It only includes amounts owed to those suppliers from operating activities. Usually, these consist of credit purchases made in the past. Account payable is a current liability in the balance sheet. However, if it lasts longer than 12 months, it may also appear under the non-current section.
Account payable is also known as trade payable. Here is a detailed article for further reading on account payable.
What is a Note Payable?
A note payable is a liability that comes from money owed to third parties from notes. A “note” is a written document that includes an obligation to repay a loan in the future. For example, they may consist of a loan from a lender in exchange for a note. Notes payable may appear as a current or non-current liability in the balance sheet.
For further reading on notes payable, visit this article.
What are the similarities between Account Payable and Note Payable?
Accounts and notes payable are similar in various regards. Some of the most prominent similarities include the following.
Liability
Both account and note payable meet the definition to fall under liabilities. They are obligations from past events and result in an outflow of economic benefits. Similarly, accounts and notes payable are payable to third parties. In the former case, the repayment occurs to a supplier. On the other hand, a note payable can be to any party, including suppliers.
Accounting
The accounting for both accounts and notes payable occurs similarly. Both require creating a liability during the initial transaction and removing it on repayment. However, the classification may differ based on the party to whom the debt gets repaid.
Working capital
Both accounts and notes payable are a part of a company’s working capital. However, some notes payable may not fall in that category if they are long-term. The same may hold for accounts payable, although long-term trade payables are rare.
What are the differences between Account Payable and Note Payable?
Despite the similarities, accounts and notes payable are very different. Some of the differences include the following.
Transaction type
Account payable only includes balances repayable to suppliers due to trade activities. On the other hand, note payable involves an underlying written document, which is not a part of activities. Therefore, an account payable is only repayable to suppliers. A note payable, on the other hand, can be made to any party.
Length
In most cases, account payables are short-term. Most companies receive a limited time from suppliers, usually within the first few months. On the other hand, note payables can be either short- or long-term, depending on a company’s needs.
Terms
Account payables come with more lenient terms for repayment. Usually, these come with a credit limit and repayment time. On the other hand, note payables include specific terms. These may consist of maturity periods, default clauses, interest rates, etc.
Conclusion
Accounts and notes payable are liabilities that companies accumulate during their operations. The former occurs to suppliers only. On the other hand, notes payable come from third parties. Both accounts are similar in various aspects. However, they are also fundamentally different due to the factors discussed above.
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