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Accounts Payable Vs. Notes Payable: Differences & Examples

Accounts payable represents the amount a company owes its suppliers for goods or services purchased on credit. It is typically used in a company's day-to-day operations and appears as a short-term liability on the balance sheet. 

On the other hand, notes payable refers to a written promise made by a borrower to repay a lender a specific sum of money at a specified future date or upon the holder's demand. Notes payable often involve larger, long-term assets such as buildings and equipment and have both principal and interest components. Appearing as a liability on the balance sheet, notes payable generally have a longer-term nature, greater than 12 months. The length of time in which the loan is due dictates whether it’s recorded as a short or long -term liability. Short- term liabilities are those due within 12 months and long- term are due in more than 12 months.  

Key Takeaways

  • Accounts payable deals with a company's short-term liabilities for goods or services purchased on credit.
  • Notes payable involve a written promise to repay a loan and are usually linked to long-term assets.
  • Both accounts payable and notes payable are liabilities, but they differ in terms of purpose, components, and time duration. 

Understanding Accounts Payable 


Accounts payable are short-term liabilities that a company owes to its vendors or suppliers due to the credit purchase of goods and services. This money is paid back to maintain good working relationships and establish creditworhthiness with suppliers. Accounts payable are recorded as a current liability on the company's balance sheet. 


Managing Cash Flow: Efficient accounts payable management is crucial for a company to maintain a solid cash flow. This involves tracking the company's obligations and using cash wisely to pay off short-term debts when they are due. Properly managed accounts payable can lead to more favorable payment terms from suppliers. Some companies choose to extend payments beyond the agreed upon terms of sale if they don’t feel that they have the funds to pay on time or to improve their own cash balance to fund operations. Days Payable Outstanding is a metric often used by businesses to track the average time they take to pay invoices. If a company is buying on 30 day terms, their actual DPO could be over 40 or even 50 days.   

Creditworthiness: A company's ability to meet its accounts payable obligations on time impacts its credit rating. Businesses that consistently pay their vendors on time are viewed as more credible, which can lead to better loan terms and improved relationships with suppliers. 

Cost of Goods Sold: As accounts payable represent the purchases made by a business on credit, these obligations directly impact the cost of goods sold (COGS). The timely and efficient payment of accounts payable helps a company accurately determine its COGS and profitability. 

Discount Opportunities: Some suppliers offer early payment discounts to incentivize companies to pay their accounts payable promptly. Taking advantage of these discounts can lead to cost savings and better profit margins for the business. 

Understanding Notes Payable 


Notes payable represent a formal contract between a borrower and a lender. It consists of a written promise to repay a loan, usually specifying the principal amount, interest to be paid, and a due date. These notes are typically issued when obtaining a loan from a bank, purchasing a company vehicle, or acquiring a building for the business.  


In contrast to accounts payable, which mainly involves purchasing goods or services on credit from suppliers and vendors, notes payable often involve a detailed agreement with organizations like banks, credit companies, or other financial institutions. The loan could be made by an entity other than a bank. Parent companies, individual owners or others could make a loan to a company that would result in a note payable. 

The existence of notes payable in a company's financial records implies a more significant and structured liability than accounts payable. The agreement's repayment terms, interest rates, and other aspects can impact the company's cash flow and overall financial health. When dealing with notes payable, managing due dates, interest payments, and principal repayments carefully is crucial to maintain a solid financial position and uphold the company's reputation with lenders. 

Differences Between Accounts Payable vs. Notes Payable

In terms of Definition

Accounts Payable refers to the amount a company owes suppliers when goods are purchased or services are availed on credit. It is a current liability account that usually has a credit balance and represents amounts due to suppliers and vendors.

Notes Payable, on the other hand, represents a written promise by a company to pay a specific sum of money at a specified future date or upon the demand of the holder who received the note. It is typically used as a liability account to record a debt payback and is issued to banks, credit companies, and other lender.

In terms of Types and Scope

Accounts Payable covers a wide range of short-term obligations such as:

  • Purchases of goods used for COGS 
  • Services including marketing, consulting, transportation, IT or janitorial.  
  • Utilities

These obligations generally have shorter payment terms, usually within 30 to 90 days.Terms can be longer for large ticket items, custom products or on export transactions.

Notes Payable, however, can be classified into two types:

  1. Short-term Notes Payable: These have repayment terms of less than one year. They are often used for working capital needs or to finance seasonal operations.  
  2. Long-term Notes Payable: These have repayment terms of more than one year. They are typically used for financing long-term assets, mergers, or acquisitions. The portion of long term debt that is due within one year is listed as short-term debt on the balance sheet.

In terms of Accounting Treatment

Accounts Payable:

  • Recorded as a current liability on the balance sheet 
  • Credited when goods or services are purchased on credit
  • Debited when payments are made to suppliers and vendors 

Notes Payable:

  • Can be classified as either current or non-current liabilities based on their repayment terms 
  • Recorded on the balance sheet as a separate liability account
  • The principal amount is credited when the note is issued. 
  • Interest expense is accrued during the term of the note and is recorded as a separate liability (interest payable)
  • The principal amount is debited, and the liability is removed when the note is paid off. 

Similarities Between Accounts Payable and Notes Payable

In terms of Liabilities

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. Being liabilities, they are recorded on the balance sheet, thus affecting the financial health and solvency of a company.

  • Accounts payable: These are short-term debts that arise from purchasing goods or services on credit, typically due to suppliers or vendors. 
  • Notes payable: Essentially a written promise to pay a specific amount of money at a specified future date or on demand, these debts can be short or long-term and usually involve formal written contracts with banks, credit companies, or other financial institutions.

In terms of Payable Nature

Both accounts payable and notes payable share the common aspect of being payable in nature, meaning they involve debts that a company must pay to settle its obligations.

  • Accounts payable: The company must pay this debt within a relatively short period, within 30, 60, or 90 days, depending on the credit terms agreed upon with the supplier or vendor.
  • Notes payable: Although they may have varying terms and durations, including long-term debts, note holders expect the company to fulfill its commitment to repay the borrowed sum according to the terms outlined in the contract. 

In summary, accounts payable and notes payable share similarities in terms of being liabilities and having a payable nature, representing the obligations a company must fulfill by making payments to its creditors.

Practical Examples

In the business world, accounts and notes payable are commonly used for different purposes. Here are some practical examples to illustrate the differences between the two.

Example 1: Goods Purchased on Credit

A retail store orders and receives $10,000 of merchandise from a supplier. The supplier offers 30-day payment terms, which means the retail store has 30 days to pay the outstanding amount. In this case, the retail store would record the $10,000 as accounts payable, a current liability on the balance sheet. Since no written promissory note is involved, it falls under accounts payable. 

Example 2: Business Loan from a Bank

A small manufacturing company needs additional funds to expand its operations. It approaches a bank and takes out a $50,000 loan, agreeing to repay it with interest over three years. In this situation, the manufacturing company would record the $50,000 as notes payable, a liability account. This is because there's a written promissory note detailing the loan terms and repayment schedule. 

Example 3: Service Rendered on Credit

A software company hires a marketing agency on a six-month contract, agreeing to pay the agency $30,000 at the end of the contract period. At the end of the contract, the software company is obligated to pay the marketing agency. This would be classified as accounts payable, a financial obligation from services rendered on credit. 

Example 4: Equipment Financing

An established restaurant upgrades its kitchen equipment and purchases $20,000 worth of appliances from a vendor. The vendor provides the restaurant with a financing option, allowing the restaurant to pay for the equipment in installments over two years with an agreed-upon interest rate. In this case, the restaurant would record this transaction as notes payable, as it involves a written agreement detailing the payment terms and interest charges. 

These examples show the practical application of accounts payable and notes payable in everyday business scenarios. Understanding the differences between the two is essential for accurate financial record-keeping and decision-making.


In summary, accounts payable and notes payable are essential aspects of a company's financial management, but they serve different purposes. Accounts payable represent obligations owed by the company to its suppliers for goods or services purchased on credit, whereas notes payable involve a formal written agreement detailing the repayment terms for a loan.

Managing these two liabilities is crucial for businesses to maintain healthy cash flows and ensure timely payments to vendors and lenders. While accounts payable often involve shorter-term debts and less formal agreements, notes payable typically have more extended repayment terms and involve the payment of interest.

Understanding the differences and critical roles of accounts payable and notes payable is essential for corporate accountants and financial managers. By properly managing these financial liabilities,  businesses can better optimize their cash flows , maintain strong relationships with clients and reduce the risk of financial distress.

In closing, the accurate recording and management of accounts payable and notes payable are vital components of a successful financial strategy. Ensuring proper handling of these two aspects will contribute to a company's overall financial health and stability, benefiting both the company and its stakeholders.