Accounts Payable vs Notes Payable: 4 Key Differences

Accounts Payable vs Notes Payable: 4 Key Differences

  • AP and NP denote liabilities in a balance sheet but are often confused with being the same
  • As accounts payable entries represent common expenses, they are considered relatively low risk while notes payable are related to enterprise asset purchases or large borrowings
  • Accounts payable automation has eliminated the need for manual invoice processing, reducing cost and chances of erro
June 03, 2022 | Market Intelligence Blogs

Businesses use accounts payable (AP) and notes payable (NP) as instruments to calculate and monitor their total liabilities to banks, merchants or other financial institutions.

AP and NP denote liabilities in a balance sheet. As such, they are often confused with being the same but are fundamentally different from each other.

What is Accounts Payable?

Accounts payable (AP) is money a business owes to its vendors or suppliers for purchases made on credit. The total outstanding payments a business owes its suppliers are recorded as the accounts payable under liabilities on a company’s balance sheet.

As a short-term liability, any increase or decrease in the total from the previous financial period is recorded under cash flow. A balanced accounts payable helps a business maintain a sound bottom line.

What is Notes Payable?

Notes payable is a ledger liability account where an organization records the face value of its promissory notes. The balance represents the notes payable amount yet to be paid.

Notes payable, a long-term liability, requires the issuer/borrower to pay interest. So, a business will have to show the interest it pays as an expense, and the interest incurred but not yet paid will be recorded under interest payable on the liability side of the balance sheet at the end of the accounting period.

Accounts Payable VS Notes Payable: Essential Differences

Differences Accounts Payable Notes Payable
Impact on company’s capital Accounts payable plays an important role in calculating a business' total capital available to carry out its day-to-day operations. Notes payable significantly impacts the working capital estimates of a business based on the type of liability. Not suitable for forecasting, the short-term notes payable liabilities can determine the current capital requirement of a business.
Risk As accounts payable entries represent common expenses, they are considered relatively low risk. Many businesses quickly pay off their due invoices to maintain a good credit score. As notes payable entries refer to high-risk customers with negative credit scores, they have predetermined terms on which interest is accrued over time.
Payment Receipt Accounts payable amounts are relatively small, with vendors, subcontractors and suppliers as general recipients. Notes payable are related to enterprise asset purchases or large borrowings, with credit companies and banks being the recipient.
Specific Terms Payments under these rarely have specific terms. Such entries have a due date, late fee and early payment discount without specifying creditors' obligations. Payments under this have a maturity date and period, payment schedule, interest rate and all related clauses vis-à-vis its non-payment. These are put in place when a promissory note is signed.

AP Automation

With the advent of technology, there has been a constant focus on the automation of the accounts payable (AP) process. AP automation through digital transformation  is the key to overcoming the inherent deficiencies that plague the process, such as manual and paper-based processes resulting in high invoice processing costs.

AP Automation Software Usage Impact:

Before use After use
On average, individual invoice processing costs $11. The invoice processing cost is $2.50, or 77% less than average.
It takes 10 days to process a single invoice. It takes a minimum of 3 days to process an invoice.
Nearly 25% of the total invoices for processing are flagged for an exception. The invoice exception rate is cut to 10.6%.

AP automation software with AI-enabled Optical Character Recognition (OCR) technology has changed invoice processing.

AI helps carry out two-way or three-way matches of invoices to optimize the workflow. AI and ML-based AP automation software have self-learning capabilities. The software learns and refines how it performs its work over a period.

Additional Read: AP Automation Ensures Hassle-Free Invoice Audit

Benefits of using AP automation software

  • AP automation allows businesses to cut down invoice processing time significantly. Companies can pay their suppliers on time and optimize their working capital via early payment discounts.
  • Thanks to AI, AP automation have become more accurate. Such software eliminates processing errors and instances of duplication, thereby cutting down on financial irregularities to be at par with compliance norms.
  • Cloud-based AP automation software continuously gets upgraded over time, with new patches added to make it more efficient and scalable.

Additional Read: Automation Makes Life Easy for AP Teams

To sum up

AP automation through digital transformation has eliminated the need for manual AP processing, thereby reducing the chances of human error. The addition of AI, ML and cloud computing has revolutionized how AP automation works, overcoming legacy systems' shortcomings.

Learn more about AP automation in this GEP white paper.

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