Notes payable and long-term debt are both forms of borrowing, but they differ in terms of their duration, repayment terms, and classification on a balance sheet.
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While both Notes Payable and Long-Term Debt are liability accounts on a balance sheet, notes payable tends to much shorter in duration, thus are typically (but not always!) classified as a short-term or current liability.
Duration
- Notes Payable – Typically refers to short-term borrowings, with repayment due within one year or the operating cycle of the business, whichever is longer. Notes payable are often used to cover immediate financing needs or short-term obligations.
- Long-Term Debt – Refers to borrowings with a maturity period exceeding one year. Long-term debt obligations extend over an extended period, often several years or even decades. They are used for financing significant investments or assets with long-term benefits.
Repayment Terms
- Notes Payable – Usually have relatively shorter repayment terms, often requiring repayment within a year from the date of issuance. Payments may be structured as lump sums or periodic installments.
- Long-Term Debt – Typically have longer repayment terms, with payments spread out over an extended period. These payments may be structured as fixed installments, variable payments, or balloon payments, depending on the terms of the loan agreement.
Classification on Balance Sheet
- Notes Payable – Recorded under current liabilities on the balance sheet if the repayment is due within one year. If there are notes payable expected to be refinanced or rolled over beyond one year, the portion due within the next year is classified as current liabilities, while the remaining portion is classified as long-term liabilities.
- Long-Term Debt – Recorded under long-term liabilities on the balance sheet, reflecting the portion of the debt not due for repayment within the next year.
Overall, while both notes payable and long-term debt represent borrowed funds, the primary differences lie in their duration, repayment terms, and how they are classified on the balance sheet.
Farm Financial Standards Council – https://ffsc.org/
Basics of a Farm Balance Sheet, Ohio State University – https://ohioline.osu.edu/factsheet/anr-64
Farm Financial Analysis Series: Balance Sheet, Mississippi State University Extension – https://farms.extension.wisc.edu/articles/preparing-a-balance-sheet/