How Are Notes Payable Different From Accounts Payable?

Notes payable is a liability account that records a written promise to repay a loan amount to the lender, with interest, by a specified due date. When taking a loan, the borrower records the loan amount as a debit to notes payable and a credit to cash. Interest expense is also recorded over time. Accounts payable differs in that it records amounts owed to suppliers on credit with no written promise or interest involved. Notes payable involves cash, notes payable, interest expense, and interest payable accounts, while accounts payable simply lists individual liabilities.

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How Are Notes Payable Different From Accounts Payable?

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Ellaine Pearl Almilla

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Notes payable is a liability account where a borrower records a written promise to repay the lender.

When carrying out and accounting for notes payable, "the maker" of the note creates liability by
borrowing from another entity, promising to repay the payee with interest. Then, the maker records the
loan as a note payable on the balance sheet.

Recording notes payable includes specifying details of the matter. Information in the written statement
generally includes the principal amount borrowed, the due date of payment and the interest to be paid.

How are notes payable different from accounts payable?

Though both notes payable and accounts payable are similar in that they are both liability accounts, they
each have their differences and serve their own unique purpose.

While notes payable is an account that details the specifics of a borrowed amount in note form,
accounts payable is an account that is normally used to record liabilities in the form of purchases on
credit from business suppliers. Though notes payable includes a written promise to repay what was
borrowed (with interest) by a set date, accounts payable includes nothing of the sort. With no written
promise, this is perhaps the biggest difference between the two accounts.

Another clear difference between notes payable and accounts payable is how these two are recorded.

Here are the differences both accounts make on the balance sheet:

Notes payable

On a company balance sheet, a loan detailed as notes payable involves the following accounts:

 Cash

 Notes payable

 Interest expense

 Interest payable

When repaying a loan, the company records notes payable as a debit entry, and credits the cash
account, which is recorded as a liability on the balance sheet. After this, the business must also consider
the interest percentage on the loan. This amount will be recorded in the interest expense account as a
debit entry, and the same amount will be appear in the interest payable account as a credit.

Accounts payable

Where notes payable involves four different accounts when repaying a loan, accounts payable refers to
individual items that are considered liabilities to the business. These are each counted as separate
entries from this same account on the liability side of the balance sheet. Because these are resources
used rather than money borrowed, there is no interest charged. Additionally, the amount paid for each
item is subject to change based on the amount used and the frequency at which it was used. Some of
the most common liabilities listed on a company's balance sheet are as follows:

 Electricity

 Internet
 Gas/heat

 Consulting services

 Legal services

 Insurance

Examples of notes payable

Here are a few examples to help you record your loans and interest as notes payable on your balance
sheet:

Example 1

Tina borrows $5,000 from Keisha to secure a down payment for her new restaurant's mortgage. Tina
signs the note as the maker and agrees to make payments to Keisha every month in the amount of $500,
along with $50 interest until she pays off the note. With this information, she will carry out the following
on her balance sheet:

The loan amount of $5,000 will be recorded as a debit to notes payable and as a credit to the cash
account.

DebitCreditNotes payable$5,000
Cash
$5,000Then, the interest amount of $50 will be recorded as a debit to interest payable and as a credit to
the cash account.

DebitCreditInterest payable$50
Cash
$50### Example 2

Your friend Rodrick is starting a new business, so you loan him $10,000 as one of his investors. Rodrick
signs the note as the maker, agreeing to repay the loan on a monthly basis in the amount of $225. The
agreement includes interest payments of $60 alongside each monthly payment. As the borrower,
Rodrick's balance sheet will reflect the following:

The loan in the amount of $10,000 will be recorded as a debit in notes payable and as a credit to the
cash account.

DebitCreditNotes payable$10,000
Cash
$10,000Next, the interest owed to you in the amount of $60 will be recorded as a debit in interest
payable and as a credit to the cash account.

DebitCreditInterest payable$60
Cash
$60Not all interest payments are structured to reflect the same amount of payment each month. The
following example is for loans accompanied by an interest rate rather than a set interest payment per
month:
Example 3

You take out a $70,000 loan from the bank on behalf of your bakery to open a second location. The bank
has you sign the note as the maker, and you agree to pay back the loan with monthly payments of $140.
Additionally, the loan collects interest at 5%. Your balance sheet will display the following information:

This $70,000 loan will be reflected as a debit in notes payable and as a credit to the cash account.

DebitCreditNotes payable$70,000
Cash
$70,000Then, the interest must be calculated. The interest rate is 5% of the loan amount, meaning you
can calculate it by doing the following: