Major differences between accounts payable and notes payable

Whether you are just beginning to master the art of accounting, or you are a business professional who must possess some understanding of accounting terms, it is important to know that although some terms sound similar, they are not.

A set of terms that some tend to confuse or use interchangeably is accounts payable and notes payable.

For a variety of reasons, there are major differences between the two. Let’s discuss a few as well as some solutions for reducing errors.

What is Accounts Payable?

An accounts payable entry is a liability entry in the accounting ledger. It is an entry used to denote that a company made a purchase, usually from a supplier, on credit. When a company and supplier have a good business relationship, the supplier allows the company to receive their goods first and pay later. In the business world, invoices are sent and are expected to be paid in 30 days. When a company and supplier have a longstanding business relationship, they may request payment in 60 and up to 90 days after delivery.

What is an Example of Accounts Payable?

If Company A purchases boxes for shipping from Supplier A, Supplier A agrees to deliver the goods and invoice Company A for the total amount of the payment where the invoice is expected to be paid within 30 days. For Company A, this is an accounts payable entry in their accounting ledger. It is a liability for Company A. Although the shipping boxes were purchased on credit, the invoice is a liability because Company A owes payment to Supplier A.

What is Notes Payable?

Notes payable is a liability, too. A note in accounting is a loan. Therefore, a notes payable is used to denote that your company has taken out a loan from a financial institution. In the business world, loans operate a little differently. Sometimes, financial institutions will allow a business borrower to take out a loan and not have a due date until one year later. A promissory note, or a promise to pay, is issued with the principal amount borrowed, interest to be paid and due date.

What is an Example of Notes Payable?

When the machines of a company have to be replaced, it requires a hefty investment. Often, due to other accounting advantages, a loan will be taken out to pay for the machines. The financial institution that agrees to fund the loan will provide a promissory note to Company A. Company A denotes the loan and the information as a notes payable in its accounting ledger. This is a liability because it is a debt that must be paid back. If the due date is longer than one year, the note is a non-current liability. Once it enters the due within the year period, it becomes a current liability.

What is the Major Difference Between Accounts Payable and Notes Payable?

The major difference between an accounts payable and notes payable accounting entry is that an accounts payable denotes a liability that must be paid within the invoice due date for goods purchased on credit. A notes liability is a loan or debt taken on by a company and funded by a financial institution.

How Can I Reduce Errors between Accounts Payable and Notes Payable?

There are several reasons why accountants can make sizable salaries when they acquire big-time clients. Understanding the minuscule but important differences among accounting terms is one. Even the most seasoned accounting professional can make an error. One way to reduce human error is to acquire and install accounts payable audit software.

How Do I Set Up Accounting Audit Software?

After the best accounting audit software has been chosen, it is time to set up. Most software can now be installed without the help of those who designed it. Simply follow the prompts and ensure enough time is allotted for the install. If there is an IT department, those professionals can ensure everything is installed correctly and in a timely manner.

What are the Benefits of Accounting Audit Software?

Even if there is no software, an audit should be an activity that takes place at regular intervals. An audit helps your company discover discrepancies in invoices, payments or credits. Essentially, the goal is to ensure that the books are properly balanced, especially because if a government agency audits the company and they discover the discrepancy, fines can be issued. Plus, a company has the obligation to report the correct numbers to its shareholders.

How Does Software Audit Accounts Payable?

Software audits accounts payable in the same manner as a professional. It ensures all entries reconcile and that all entries are properly recorded.

For most companies, auditing accounts payable is not optional. Ensuring entries are properly recorded is a must including accounts payable and notes payable.