What Are Loans and Advances in Balance Sheets?
Loans and advances are general descriptions of debt obligations companies owe and must show on their balance sheet as part of total liabilities. Formal contracted loans are typically designed as "notes payable" on a balance sheet, whereas advances or purchases on credit are recorded as accounts payable.
The balance sheet is one of four common financial reporting statements prepared by company accounts. The others are the income statement, statement of cash flows and statement of retained earnings. Of these, the balance sheet is generally regarded as the statement that offers the best overall picture of the company's financial health. Following the formula assets equal liabilities plus owners' equity, the balance shows all of a company's assets, subtracts its liabilities or debt obligations, and shows owners' equity as the difference. Liabilities include both short-term debts and long-term debts.
Notes payable is an account used to show what a company owes on contracted loans. These are formalized loan agreements made with lenders for the financing of such purchases as buildings, equipment, company vehicles and inventory. The company has a legally documented note that lays out how much principal is owed, along with the interest rate and repayment terms. The notes payable accounts show the company's total debt obligation.
Accounts payable refers to a liability account that depicts money the company owes for the purchase of materials, products or services purchased on credit. These debt obligations are often referred to as trade payables because they typically relate to credit accounts resellers have with suppliers. They are able to purchase inventory on credit and pay for it within a certain period of time. The main difference with accounts payable from notes payable is there is no promissory note.
Notes payable and accounts payable, or related terms, often show up in separate sections of the liabilities portion of the balance sheet. Notes payable are often longer-term repayment periods, which are shown under long-term liabilities. Accounts payable are more often shorter-term financing arrangements, which are shown under current liabilities. Typically, current liabilities are for amounts due in 12 months or less. Long-term liabilities have longer repayment time frames. Notes payable within 12 months could show in the current liabilities section.