Difference between Accounts Payable and Notes Payable | Financial Accounting II
Difference between Accounts Payable and Notes Payable
Financial Accounting II
BBA | BBA-BI | BBA-TT | BCIS
Difference between Accounts Payable and Notes PayableAn 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.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.Accounts payable is not charged with interest or other fees while notes payable have a specific interest rate and service charges.Notes payable are usually offered by banks and other financial institutions while accounts payable are offered by suppliers of goods and services.
| Basis | Accounts Pyable | Notes Payable |
| Definition | Accounts Payable is the obligation that a business owes to its creditors for buying goods and services. | Note payable is a written promissory note under which a borrower obtains a specific amount of money from a lender and promises to pay it back with interest over a predetermined time period. |
| Mode of agreement | Accounts Payable is an informal and verbal agreement. | Notes Payable is an formal and written agreement. |
| Origin | It originates from the purchase of tradable items or inventories. | It originates from the purchase of tradable items or inventories and it may also evolve in case of purchase of long-lived assets or borrowing or to satisfy the existing obligation. |
| Terms | There is no specific terms such as maturity period ,interest rate included with accounts payable. | There is specific terms such as maturity period ,interest rate included with notes payable. |
| Interest | There is no interest associated with the accounts payable. | Interest is explicitly or implicitly involved with notes payable. |
| Time | It is a short term liability. | It may be short-term or long term liability. |
| Risk of custom er | It is created in case of low risk customer. | It is created in case of high risk customer. |
| Possibility | Accounts payable can be converted into notes payable. | Notes payable can be never converted into accounts payable. |
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