Wize University Introduction to Financial Accounting Textbook > Current Liabilities
Accounts Payable and Notes Payable
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Accounts Payable
An account with a supplier is on going credit agreement that allows the purchaser to receive goods and services from a supplier, and pay it at a later date.
Characteristics of Accounts Payable
- Money owed to suppliers
- Must be paid within the suppliers credit terms
- Does not charge interest
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Notes Payable
A note payable, also called a promissory note, is a promise to pay a principal amount plus interest on a specific date. Notes are typically signed when loans are taken or when agreements between two parties have been made regarding the future payment of some amount.
Characteristics of Notes Payable
- Borrower promises to pay lender specific amount plus interest
- Credit cannot be reused when the loan is paid, a new note would be needed
- Can be used to extend accounts payable beyond their due date
Interest on Notes
- Interest rate is always expressed annually unless specifically stated otherwise
- Interest accrues over time
- There is no interest expense at the time the note is signed
- Interest expense must be recorded in the period it was incurred
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Example: Accounts Payable and Notes Payable
Prepare the following journal entries.
- On January 6th, ABC Inc. purchases $4,000 of inventory from a supplier on account under the terms 3/10, net/50.
- On February 17th, ABC Inc. borrows $50,000 from the Bank of America and agrees to repay the principal in 6 months plus all interest. The interest rate is 5%.
- On February 25th, ABC Inc. requests an extension from their supplier as they will not meet the deadline to pay for the inventory purchase. The supplier grants a 3-month extension with a 6% interest rate.
On August 17th, ABC Inc. repays Bank of America as per the written agreement.
Practice: Accounts Payable and Notes Payable
Prepare the necessary journal entries for Eaters Public House restaurant
Received its monthly invoice from Hydro Corporation totalling $865 for electricity. The due date on the invoice is in 25 days.
Transactions:
| Account | Debit | Credit |
|---|---|---|