What is the usual difference between accounts payable and notes payable?

• A. Accounts payable are typically informal, short-term obligations, while notes payable are formal, often written promises to pay a specific amount at a future date.
• B. Notes payable are only used for inventory purchases, while accounts payable are used for all other expenses.
• C. Accounts payable are classified as long-term liabilities, while notes payable are always current liabilities.
• D. Accounts payable always require interest payments, while notes payable do not.

Answer: (A)

Verified step by step guidance

1. Understand the definitions of accounts payable and notes payable: Accounts payable refers to short-term obligations to suppliers for goods or services received, typically informal and without interest. Notes payable, on the other hand, are formal written promises to pay a specific amount, often including interest, and can be either short-term or long-term liabilities.
2. Analyze the nature of accounts payable: These are usually informal agreements and are classified as current liabilities on the balance sheet. They do not typically involve interest payments.
3. Analyze the nature of notes payable: These are formal agreements, often documented with a promissory note, and may include interest payments. They can be classified as either current or long-term liabilities depending on the repayment terms.
4. Compare the classification of liabilities: Accounts payable are always classified as current liabilities, while notes payable can be classified as either current or long-term liabilities based on the repayment period.
5. Evaluate the payment terms and interest requirements: Accounts payable generally do not require interest payments, whereas notes payable often include interest as part of the repayment terms.