Accounts Payable vs. Notes Payable
ABC Coworking Company purchases 20 coffee vending machines on credit. It must pay the vendor the cost of those 20 machines within 45 days upon delivery and installation. ABC Coworking Company uses this time to check all specifications and usage of the vending machines and begins to seek approvals from the management for payment. Until then, the vendor is a creditor and ABC Coworking Company would collate the invoices as accounts payable balance.
To extend its claws in the coworking market, ABC Coworking Company takes a bank loan of USD 5 million and must pay back the principal amount with interest. The company signs a promissory note to the bank on the principal amount and the interest levied on the loan. The borrower records the principal amount of USD 5 million as notes payable, wherein it must also record the interest accrued on its financial statements.
What is Accounts Payable?
Accounts Payable could appear as invoices and bills reflecting outstanding money due to be paid to a supplier for goods or services. It is a short-term obligation and a current liability. It typically does not bear any interest or penalties unless it is defaulted.
Also Read: Key Differences between Accounts Payable vs. Accounts Receivable
Understandably, the unitary method suggests if payables keep growing, it means that the firm is buying more goods on credit. If the payables decrease, it is believed that the company is paying dues well within the timelines.
Role of Accounts Payable
Accounts Payable’s role bears significance in the managerial, operational, and financial efficiency of the business. It reflects the company’s reputation of how it treats its suppliers and creditors. Broadly, it may be considered for playing the following roles to enhance and secure the company from losing track of its commitments.
Supplier and Creditor Relations
It ensures to meet transactional deadlines and abide by terms and conditions, which further paves way to smoother deliveries.
Cashflow Management
It forecasts pending and upcoming payments; schedules payments to maintain balance between liabilities and available cash.
Compliance
It ensures fair compliance with the ethos and policies of the enterprise. It maintains records for tax filing and audit purposes.
Security Against Errors and Fraud
It executes internal control over the financial system to avoid any degree of fraudulence and mistakes. It facilitates 3-way matching so that one can correlate invoices, receipts, and purchase orders.
Expansion and Scalability
The liberty for an enterprise to not make payments upfront allows the entity to use the working capital to raise scalability through marketing campaigns or upgrading of machinery or equipment. Accounts Payable allows the enterprise to hold outflow of cash for a certain period, encouraging other growth initiatives for the enterprise.
What is Notes Payable?
Notes Payable is an obligation produced in writing and duly signed as a promissory note by an entity to borrow funds. The promissory note particularly includes the principal amount along the rate of interest, as part of the terms of repayment of the loan. The borrower must however include the accrued interest in its financial statements.
A Notes Payable can be both, a short- and long-term liability. In this case, there is barely any scope for negotiation wherein the terms and conditions are legally binding.
What are the Benefits of Notes Payable (NP)?
Notes Payable serves long-term engagements and provides opportunities for growth for businesses in the following ways:
Notes Payable engages in large borrowings and purchases. As compared to Accounts Payable, it engages in a more structured manner which helps to raise the credit worthiness of an enterprise.
An enterprise has the liberty to make crucial investments without having to make payments upfront.
A business need not pay a lumpsum amount but easy installments as per the repayment schedule.
Notes Payable differs from equity financing. It does not require to surrender control, shares, and ownership of a company.
Notes Payable is more cost-effective than credit cards or other unsecured loans. It bears lesser rate of interest than other forms of loans.
The promissory note provides financial and legal transparency, also in terms of expectations from both sides.
Accounts Payable vs. Notes Payable: Key Differences!
Accounts vs. Notes Payable is a contemporary choice of seeking capital for running a business.
The Notes Payable vs. Accounts Payable discussion may rest on the fact that Notes Payable is certainly a more formal and legally binding way of seeking credit. Accounts Payable is usually considered to record the entire capital of the firm, whereas only the short-term loan engagements can be taken into account in terms of Notes Payable. Understandably, one cannot draw perspectives out of forecasting or predictions when it falls to Notes Payable, which mostly serve long-term engagements.
In a nutshell, Accounts Payable is supportive of purchases where bills and invoices are paid usually within 30-90 days. Notes Payable helps build assets and projects to serve the overall growth of an enterprise.
FAQs
1. How do I record Notes Payable?
A Notes Payable can be recorded in the form of a promissory note that includes terms and conditions of repayment as against the principal amount loaned.
2. Is an invoice a Notes Payable?
No, an invoice is not a Notes Payable. An invoice is part of Accounts Payable which is generated shortly before the deadline of payment of purchase.
3. What type of entry is Notes Payable?
It is a current liability which is marked as a debit entry.
4. Can an Accounts Payable entry be converted to a Notes Payable entry?
Yes, an Accounts Payable can certainly be converted to a Notes Payable entry. When an entity is unable to pay the full invoiced amount usually well within a year, it can ask the creditor to convert the remaining balance into a Notes Payable by signing a promissory note.
