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Glossary

What are notes payable?

Notes payable are written promises to repay borrowed money with interest by a set date, recorded as a liability on the borrower's balance sheet until they are paid.

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How notes payable work

A note payable is a promissory note. The borrower receives a sum from a lender and agrees to repay it, with interest, over a set period. The rate can be fixed or move with a benchmark such as the prime rate. In the accounts, the face value goes in a notes payable liability account, and interest owed but not yet paid goes in a separate interest payable account under accrual accounting.

Notes payable vs. accounts payable

  • Notes payable. A formal written note, usually with interest, often for loans or financing equipment. Can be short or long term.
  • Accounts payable. Amounts owed to suppliers for goods or services on credit, with no note and normally no interest, though late fees can apply.

How Aavenir handles it

Aavenir does not manage loans, but supplier payment terms are part of every contract it handles. Invoiceflow checks invoices against the signed payment terms and discounts, so accounts payable pays what the contract says, when it says.

Example

A company borrows to buy a delivery truck and signs a note promising to repay the sum, with interest, over three years. The amount due in the next year is a current liability, the rest is long term, and interest builds up in interest payable until it is paid.

Keep reading

Accounts payable Accounts payable is the money a business owes suppliers for goods and services received but not yet paid, shown as a liability, and the team that pays it.Read more Net 90 Net 90 is a payment term giving the buyer 90 days from the invoice date to pay in full, sometimes with a discount offered for paying earlier.Read more Financial supply chain management Financial supply chain management treats the money flowing between trading partners as one process, covering procure to pay, working capital and order to cash.Read more

Frequently asked questions (FAQ)

Common questions

Are notes payable a current or long term liability?

Both are possible. The portion due within a year is a current liability, and the rest is long term. A short term note is entirely current. Read about accounts payable.

What is the difference between notes payable and accounts payable?

Notes payable come with a written promissory note and usually interest. Accounts payable are trade debts to suppliers on normal credit terms, with no note. They also sit in different accounts. See Invoiceflow.

How is interest on notes payable recorded?

Interest builds up over the life of the note. Under accrual accounting, interest owed but not yet paid is recorded as interest expense and as a liability in interest payable. Read about financial supply chain management.

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