In other words, a document payable is a loan between two entities. Under this agreement, the document maker creates liability by borrowing money from the creditor. The company agrees to reimburse the money with the respective interest to the creditor at a future date.
The business records the loan on its balance sheet as a document payable. On the other hand, the creditor records the loan as an account receivable on its balance sheet, because it will receive the payment in the future. They differ from accounts payable in that, while both are liabilities, documents payable involve a written promissory note.
Characteristics of Payable Documents
The characteristics of the documents payable can be appreciated when making the comparison with the accounts payable.
Agreement type
Accounts Payable are informal agreements, often only verbal, between buyers and sellers. The only documents are a purchase order from the buyer and an invoice from the seller.
Payable documents are more complicated. They involve formal, written loan agreements, sometimes with dozens of pages.
The lender may require restrictive agreements as part of the document payable contract, such as prohibiting the payment of dividends to investors while a portion of the loan has not yet been paid.
The deal may also require a guarantee, such as a company-owned building or a guarantee from a person or another entity.
Many promissory notes require formal approval from a company's board of directors before the lender will grant funds.
Terms and security
Accounts payable are normally repaid within 30 days without interest. However, some providers may offer discounts for prepayment, such as a 1% discount if paid within 10 days of the invoice date.
Documents payable are reimbursed in longer terms, with a specific expiration date; they can start at 90 days and extend up to several years. Payments are generally fixed amounts for principal and interest.
When it comes to security, product and service providers rely on the buyer's good faith for payment. Accounts payable are not secured with collateral. On the other hand, promissory notes generally take the fixed assets that are purchased as collateral for the loan.
Payable notes are typically used to purchase fixed assets such as equipment, plant facilities, and property. These are formal promissory notes for a specific amount of money that a borrower pays over a certain period of time, with interest.
Documents payable in the short and long term
Notes payable are generally reported on the balance sheet in two categories: short-term and long-term.
A note payable is classified on the balance sheet as a short-term liability if it matures within the next 12 months, or as a long-term liability if it matures later than one year.
For example, a short-term loan to purchase additional inventory in preparation for the holiday season would be classified as a current liability, as it will likely be repaid within a year.
The purchase of large land, buildings, or equipment will commonly be classified as a long-term liability, as long-term loans will be repaid over many years.
The short-term portion of the document payable is the amount due within the next year. The long-term portion is the one that expires in more than one year.
Proper classification of notes payable is of great interest from an analyst's perspective, to see if these notes expire in the near future. This could indicate an impending liquidity problem.
Example
An example of a document payable is a loan granted by a bank to the HSC company.
HSC borrows $ 100,000 from the bank to buy this year's inventory. The HSC company signs the document as a borrower and agrees to repay the bank monthly payments of $ 2000, including $ 500 monthly interest, until the document payable is paid in full.
HSC debits $ 100,000 from your cash account and credits your Documents Payable account for the loan amount. The bank does the opposite: debits your receivables account and credits your cash account.
At the beginning of each month, HSC makes the loan payment for $ 2000, debiting the documents payable account for $ 1500, debiting the interest expense account for $ 500 and credits the cash account for $ 2000.
Again, the bank records the reverse of the transaction. Debt cash for $ 2000, credit documents receivable for $ 1500 and interest income for $ 500.
Difference between account payable and document payable
For example, if a company wants to borrow $ 100,000 from its bank, the bank will require company executives to sign a formal loan agreement before the bank releases the money.
The bank could also require the business to pledge collateral and that the owners of the company personally guarantee the loan.
The company will record this loan in the Papers Payable ledger account. The bank will post the loan to your receivables ledger account.
In contrast to the bank loan, it is enough to call one of the company's suppliers and request a delivery of products or supplies. The next day the products arrive and a delivery receipt is signed.
A few days later, the company receives an invoice from the supplier stating that the payment for the products is due in 30 days; this transaction did not involve a promissory note.
As a result, this transaction is recorded in the company's general ledger accounts payable. The vendor will record the transaction with a debit to their accounts receivable asset account and a credit to the sales account.
