Every business needs capital to function on a daily basis. The transactions that happen between a business and its vendors, suppliers, financers, or creditors are recorded in the company's cash flows or balance sheets as accounts payable or notes payable.
But what are these terms, and how are they different from each other?
Let's try to understand notes payable vs. accounts payable, what they are, and how they differ.
Notes payable are a much more formal arrangement of “liabilities” a business has on its balance sheet.
In simpler terms, notes payable are the long-term debts a business has collected with a promise to pay them back within the terms set in a legally binding document (like a promissory note).
Notes payable are long-term liabilities that affect the balance sheets – typically longer than one financial year.
They have two main components: the principal amount and the interest amount. Since these fundings are like unsecured loans, the documents do not contain any clause that determines the protocol in the event of a default by your business.
Accounts payable can be defined as the short-term payment liabilities that your business may have towards its associates, vendors, or suppliers.
On your balance sheet, accounts payable show up as due expenses that have a term of thirty, sixty, or ninety days. These payments help with the operational expenses of your business on a not-so-formal arrangement.
One interesting feature of the accounts payable expense is that no interest is applicable to the principal.
The suppliers may, at their discretion, charge a late payment fee or penalty for delays on your business’s part for the payment due to them. The date the payment is due is usually mentioned on the invoice the vendors raise with your business.
Notes payable and accounts payable are both forms of liabilities for a business. While one impacts the balance sheets, the other doesn’t.
There are a few more key differences between notes payable vs. accounts payable, which are highlighted below:
Accounts payable is inherently more complicated than notes payable.
Even though the terms involved are simple and there is no interest to be calculated, the sheer volume of transactions that stack up as a result of growth in business associates, vendors, and suppliers impacts the complexity.
There are five major spheres in accounts payable that increase the complexity of this department.
A business has a network of suppliers and vendors that it deals with for services and goods. As a business grows, so does this network.
Supplier management thus becomes essential as the volume of accounts payable transactions grows. One way of managing suppliers is to use no-code platforms to design management software with custom requirements.
Vendors and suppliers raise invoices according to their billing cycles with your business. These invoices need to be paid off before the due date in order to ensure that you don’t pay a late payment fee.
Accounts payable departments thus employ software to keep track of invoice complexities that send reminders of due dates or defaulting risks for better management.
Another complexity that accounts payable must deal with is the responsibility of matching the invoice with the goods and services received.
Only in the event of a satisfactory delivery of the requested goods must the payment be made to a vendor.
Using no-code platforms, your business can design custom software to automate invoice approvals with predetermined protocol and matching criteria to streamline this process.
Payment processing is the next step after an invoice is approved. Complexities in transactions occur when your business is operating with vendors scattered across the globe or a wider geographic region.
Currency exchange, transaction fees, etc., may be needed to be taken into account. Using software for payment processing helps with keeping things on track.
For day-to-day business operations, it is necessary to ensure there is enough availability of working capital. It increases the complications when there is a large volume of accounts payable entries to be managed.
Timing each entry right helps ensure that there is always some working capital available to your business.
Yes, it's possible to convert an accounts payable entry into a notes payable entry.
In situations where the vendors, associates, or creditors determine that a business may not be able to deliver the promised payment within the term agreed upon, they may request a promissory note from the business.
This promissory note would contain the details of the repayment of the leftover balance payment due to the creditor.
When this happens, the business debits its accounts payable for the remaining amount and credits its notes payable entries with the same. In this way, an accounts payable entry is successfully converted into a notes payable entry.
LeasO is a lease management software that brings lease accounting, Lease administration and Lease management all under one easy to use interface. If you wish to know more about how LeasO can help simplify your accounts payable department, get in touch with us.