Note Payable vs. Account Receivable

Note Payable vs. Account Receivable

XACC/291

November 21, 2015

According to my understanding, a note payable is a written promissory note. This means that under this agreement, a borrower will obtain a specific amount of money from a lender. The borrower, then promises to pay it back with interest over a prearranged time period. The interest rate may be fixed over the life of the note, or vary in conjunction with the interest rate charged by the lender. 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. However, this differs from an account payable, where there is no promissory note, nor is there an interest rate to be paid. There may be a penalty may be assessed if payment is made after a designated due date.

A note payable is identified in the balance sheet as a short-term liability, if it becomes due during the course of the next 12 months. A note payable is identifies as a long-term liability if it is due at a later date, beyond 12 months. The proper classification of a note payable is of interest from an analyst's perspective, to see if notes are coming due in the near future; this could indicate an liquidity problem approaching.

Both, a note payable and account payable, may be considered a liability. The company will record this loan (note payable) in its general ledger account. On the other hand, the bank will record the loan in its general ledger account “Notes Receivable”.