Notes payable vs accounts payable: Differences and examples

Managing your business finances involves handling various liabilities, including notes payable and accounts payable.

While both represent obligations your company owes to creditors, they have distinct characteristics that impact financial reporting, cash flow management, and decision-making.

This guide explains the meaning, key differences, and examples of notes payable vs accounts payable to help your accounting team manage them effectively.

Here’s what we cover:

Notes payable meaning

Notes payable refers to a formal, written agreement in which your business borrows money from a lender and commits to repaying it later, usually with interest.

Unlike short-term invoices that require quick payment, notes payable involves structured repayment terms that can extend over months or years.

Your business might use notes payable in situations such as these:

• Taking out a loan from a bank for expansion
• Financing large equipment purchases instead of paying upfront
• Negotiating extended payment terms with a supplier by formalizing the debts into a promissory note.

Components of notes payable

A notes payable agreement typically includes:

• Principal amount: the total borrowed sum
• Interest rate: the percentage charged on the borrowed amount
• Maturity date: the final repayment deadline
• Payment schedule: monthly, quarterly, or lump-sum repayment terms
• Lender details: information about the creditor providing the loan.

The importance of notes payable

Notes payable is essential for business financing, providing access to the funds needed for growth, expansion, and major purchases.

It allows your accounting team to manage cash flow strategically, making sure you have the resources to invest while spreading payments over time.

Effectively managing notes payable ensures your business can leverage financing opportunities while minimizing risks, keeping operations financially sound and sustainable.

Accounts payable meaning

Accounts payable (AP) refers to short-term obligations your business owes to suppliers or vendors for goods and services received on credit.

These debts are typically due within 30 to 90 days and, unlike notes payable, do not accrue interest.

The importance of accounts payable

Managing accounts payable (AP) effectively is crucial for maintaining healthy cash flow and strong supplier relationships.

A well-organized AP process ensures that your business:

• Maintains a positive cash flow by managing payment timing efficiently
• Avoids late fees and preserves creditworthiness with suppliers
• Strengthens supplier relationships, leading to better terms and potential discounts.

Optimizing accounts payable helps your team stay on top of obligations, reduce errors, and improve financial stability—all of which contribute to a more efficient and profitable business.

Accounts payable vs notes payable: Key differences

Understanding the differences between accounts payable and notes payable is essential for effectively managing your company’s financial obligations.

While both represent liabilities, they serve different purposes, impact cash flow differently, and require distinct accounting treatments.

Here’s how they compare:

1. Types and scope

Feature	Notes payable	Accounts payable
Type of debt	Formal loan agreement	Short-term vendor credit
Repayment term	Medium to long term	Short term (30 to 90 days)
Interest	Usually includes interest	No interest charged
Legal agreement	Formal promissory note	No formal contract
Usage	Loans, financing, structured payment agreements	Regular business purchases from suppliers

2. Accounting classification and entries

Both notes payable and accounts payable are classified as liabilities but appear differently in financial statements.

Notes payable:

• Recorded as a long-term or short-term liability, depending on the repayment period
• Includes an interest expense entry
• Requires a journal entry for principal and interest payments.

Accounts payable:

• Recorded as a short-term liability on the balance sheet
• No interest is recorded since it represents trade credit
• Reduced when payments are made to suppliers.

Tracking and categorizing these liabilities correctly helps to ensure your team delivers accurate reporting and better cash flow management.

Similarities between notes payable and accounts payable

Despite their differences, both accounts payable and notes payable share common characteristics:

Liabilities

Both are obligations that your business must settle in the future.

Payment obligation and terms

Both require your team to follow timely payments, though notes payable have structured interest-bearing schedules, while accounts payable involves short-term trade credits.

Cash flow management

Both accounts payable and notes payable have a direct impact on your business’s cash flow. Managing them well helps maintain liquidity and avoid financial strain.

Balance sheet reporting

Both are recorded on your business balance sheet:

• Accounts payable is usually listed under current liabilities
• Notes payable can appear under either current or long-term liabilities, depending on the repayment timeline.

The power of effective management

Effectively managing accounts payable and notes payable is essential to keeping your business running smoothly.

It helps maintain strong relationships with suppliers and lenders, avoids late fees, and makes sure your team can accurately report financials.

Accounts payable vs notes payable: A side-by-side comparison

Need a quick way to distinguish between accounts payable and notes payable? Here’s a clear breakdown to help you distinguish the two:

Accounts payable (AP)

• Repayment term: short-term debt—typically due within a year—for goods and services your business receives on credit.
• Legal agreement: no formal contract is required.
• Interest charged: no, these purchases usually don’t incur interest if paid within the agreed terms, and some vendors may even offer early payment discounts.
• Financial statement classification: listed as a current liability on your balance sheet. These are non-collateralized obligations, and as long as payments are made on time, supplier relationships remain strong.

Notes payable (NP)

• Repayment term: medium to long-term debt that extends beyond standard invoice terms.
• Legal agreement: yes, a promissory note is required. This written agreement outlines the principal amount, interest rate, payment schedule, and any collateral involved.
• Interest charged: yes, notes payable includes interest, which adds to the total repayment amount over time.
• Financial statement classification: can be classified as a short-term or long-term liability, depending on the repayment period.
• Lenders: often issued by banks, but other financial institutions or even vendors may provide financing through notes payable.

Notes payable vs accounts payable examples

Understanding how notes payable and accounts payable function in real business scenarios helps clarify their differences. Here are two examples:

1. Example of notes payable: you are a restaurant owner who needs to renovate the dining area and purchase new kitchen equipment. To finance the upgrade, you borrow $50,000 from a bank under a five-year repayment plan with a 5% interest rate. This loan is classified as a note payable and recorded as a liability on the balance sheet. In this case, your restaurant makes scheduled payments until the debt is fully repaid.
2. Example of accounts payable: you are part of a marketing agency that orders $10,000 worth of office supplies, including laptops, printers, and stationery, from a vendor. The vendor offers Net-60 payment terms, meaning your agency has 60 days to pay. This transaction is recorded as accounts payable, a short-term liability settled when the payment is made within the agreed timeframe.

These examples highlight the key distinction: notes payable involves formal borrowing with structured repayment and interest, while accounts payable covers short-term credit for operational expenses.

The role of accounts payable and notes payable in a P2P process

Managing vendor payments efficiently is crucial for your business procure-to-pay (P2P) process. Both accounts payable and notes payable play key roles in keeping your business running:

• Accounts payable: covers day-to-day supplier invoices and makes sure payments are approved and processed on time.
• Notes payable: manages longer-term financial obligations, such as loans or structured repayment agreements.

Keeping a healthy balance between accounts payable and notes payable helps to maintain steady cash flow, avoid late fees, and strengthen relationships with suppliers and lenders.

Streamline accounts payable and notes payable with the right software

Tired of manual payment tracking and inefficient purchasing processes?

The right accounts payable software can take the pressure off by automating key workflows and improving visibility across your business.

With the right tools in place, your accounting team can:

• Process invoices automatically,reducing manual entry and minimizing errors
• Create journal entries with ease, saving time on reconciliations and month-end close
• Track loans and debt for notes payable, keeping repayment schedules clear and organized
• Centralize documents into a single source of truth, so nothing falls through the cracks
• Automate payment scheduling and reminders,making sure bills are paid on time
• Process bills and payments across multiple entities, all within a single account
• Leverage AI-powered payment processing to optimize when and how payments are made—based on cash flow forecasts, vendor terms, and preferred payment methods
• Improve financial reporting with real-time insights into your cash position and liabilities.

Automating your accounts payable and notes payable processes not only saves time and reduces financial risk, it also empowers your team to focus on more strategic work that drives your business forward.

Final thoughts

Understanding the difference between accounts payable and notes payable is essential for keeping your business finances in check.

Here’s a quick recap:

• Accounts payable: short-term credit from suppliers, no interest, and part of routine operations.
• Notes payable: formal agreements with lenders, includes interest, and used for structured financing.

Both play a key role in maintaining liquidity and financial stability. With the right accounting software, managing these liabilities becomes easier, reducing errors and freeing up your team’s time for more strategic tasks.

Notes payable vs accounts payable FAQs

1. Are credit cards considered notes payable?

No. Credit card debt is classified separately under short-term liabilities but doesn’t fall under notes payable since it doesn’t involve a promissory note agreement.

2. Can accounts payable entry be converted to a notes payable entry?

Yes. If your business needs more time to pay off an accounts payable balance, it can negotiate with vendor to convert it into a structured notes payable agreement, extending the payment period.