Definition of Notes Payable
The account Notes Payable is a liability account in which a borrower’s written promise to pay a lender is recorded. (The lender record’s the borrower’s written promise in Notes Receivable.) Generally, the written note specifies the principal amount, the date due, and the interest to be paid.
For most companies, if the note will be due within one year, the borrower will classify the note payable as a current liability. If the note is due after one year, the note payable will be reported as a long-term or noncurrent liability.
Example of a Note Payable
If a company borrows money from its bank, the bank will require the company’s officers to sign a formal loan agreement before the bank provides the money. The company will record this loan in its general ledger account, Notes Payable. In addition to the formal promise, some loans require collateral to reduce the bank’s risk.
Definition of Account Payable
The account Accounts Payable is normally a current liability used to record purchases on credit from a company’s suppliers. In this situation there is no formal written promise to pay.
Examples of Accounts Payable
Often a company will send a purchase order to a supplier requesting goods. When the supplier delivers the goods it also issues a sales invoice stating the amount and the credit terms such as Due in 30 days. After matching the supplier’s invoice with its purchase order and receiving records, the company will record the amount owed in Accounts Payable.
Other amounts recorded in Accounts Payable will include invoices/bills that a company owes for services it had received on credit. Examples include legal services, utility bills (electricity, heat, phone), consulting services, etc.
