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September 13, 2006

What is the difference between Notes Payable and Accounts Payable?

While both of these are liabilities, Notes Payable involves a written promissory note. For example, if your company wishes to borrow $100,000 from its bank, the bank will require company officers to sign a formal loan agreement before the bank provides the money. (The bank might also require your company to pledge collateral and for the company owners to personally guarantee the loan.) Perhaps the loan paperwork will be a half inch high. Your company will record this loan in its general ledger account, Notes Payable. (The bank will record the loan in its general ledger account Notes Receivable.)

Contrast the bank loan with phoning one of your company’s suppliers and asking for a delivery of products or supplies. On the next day the products arrive and you sign the delivery receipt. A few days later your company receives an invoice from the supplier and it states that the payment for the products is due in 30 days. This transaction did not involve a promissory note. As a result, this transaction is recorded in your company’s general ledger account Accounts Payable. The supplier will record the transaction with a debit to its asset account Accounts Receivable (and a credit to its account Sales).

Learn more about the Balance Sheet.

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8 Responses to “What is the difference between Notes Payable and Accounts Payable?”

  1. luiza on October 18th, 2007 1:51 pm

    CAN YOU GIVE HOW SHALL I POST A PROMISSORY NOTE ISSUED BY ME?

  2. Nafees Ali on May 13th, 2008 1:30 am

    The balance sheets of the Ahmed Fabrics Limited at the end of 2006 and 2007 are as follows:
    Particulars 2006 2007
    Assets Rs. Rs.
    Cash 20,000 15,000
    Accounts receivable (Net) 45,000 50,000
    Merchandise Inventory 40,000 65,000
    Prepaid expenses 10,000 5,000
    Building and equipment 70,000 85,000
    Allowance for deprecation—building and equipment (7,500) (17,500)
    Land 45,000 80,000
    222,500 282,500
    Liabilities & Capital Rs. Rs.
    Accounts payable 40,000 50,000
    Accrued expenses 12,500 10,000
    Notes payable—– 30,000
    Mortgage payable 30,000
    Capital stock, Rs.10 par 150,000 185,000
    Retain earnings ( deficit) (10,000) 7,500
    222,500 282,500

    Land was acquired for Rs. 35,000 in exchange for capital stock, par Rs. 35,000,
    during the year; equipment of Rs. 15,000 was acquired for cash. Cash dividends
    of Rs. 10,000 were charged to retained earnings during the year; the transfer of
    net income (Rs. 27,500) to retained earnings was the only other entry in this
    account.
    Required:
    Prepare a statement of cash flow.

  3. mlm on April 28th, 2009 6:49 am

    to how put the debit and credit

  4. Jim on June 24th, 2009 8:54 pm

    What journal entries are made to establish a one year note payable for $1,000 on Jan. 1?

    Also, what is the journal entry to close the books for that same note assuming a 10% interest rate?

  5. Question on July 16th, 2009 6:16 pm

    please answer.
    Ex: June 1, business bought a service van for a certain amount.issued a promissory note for the 30% and balance on account.
    June 5, Paid the balance of the service van in full.

    Question: What will be covered by the payment, the 70% accounts payable or the whole hundred percent?

  6. addy on September 13th, 2009 4:13 am

    i want to know as many differences as there are b/w accounts and notes payable.plz can anyone help?

  7. Rhonda Henderson on October 22nd, 2009 10:57 am

    why not use the value payable post system opposed to cash or credit sales system

  8. kazim ali on October 29th, 2009 8:58 am

    i want to learn to basic knowledge of accounting for maintain to easy my books and look to proper data according to accounting cycle.

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