Written agreements to repay the lender a certain amount of cash
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What are Notes Payable?
Notes payable are written agreements (promissory notes) in which one party agrees to pay the other party a certain amount of cash. Alternatively put, a note payable is a loan between two parties.
A note payable contains the following information:
- The amount to be paid
- The interest rate applied to the loan
- The maturity date
- Name of the maker of the note (payer)
- Name of the payee
- The signature of the person who issued the note with the date signed.
Notes Payable on a Balance Sheet
Notes payable appear as liabilities on a balance sheet. Additionally, they are classified as current liabilities when the amounts are due within a year. When a note’s maturity is more than one year in the future, it is classified with long-term liabilities.
An example of different accounts on a balance sheet:
Notice how notes payable can be short-term or long-term in nature.
Example
John borrowed $100,000 from Michelle on January 1, 2022. John signs the note and agrees to pay Michelle $100,000 six months later (January 1 through June 30). Additionally, John also agrees to pay Michelle a 15% interest rate every 2 months.
The journal entries would be as follows:
The Difference Between Accounts Payable and Notes Payable
The concept of accounts payable and notes payable are often mixed up. A definition of both of these terms along with their respective attributes are detailed below:
Accounts Payable
Accounts payable is an obligation that a business owes to creditors for buying goods or services. Accounts payable do not involve a promissory note, usually do not carry interest, and are a short-term liability (usually paid within a month).
Notes Payable
These are written agreements in which the borrower obtains a specific amount of money from the lender and promises to pay back the amount owed, with interest, over or within a specified time period. It is a formal and written agreement, typically bears interest, and can be a short-term or long-term liability, depending on the note’s maturity time frame.
Creating an Enforceable Promissory Note
To create an enforceable promissory note, the following elements must be included:
- The loan amount
- The repayment dates
- The interest rate
- Default terms
- The names of both the lender and the borrower
- Mailing address where each payment is mailed to
- The borrower should print, sign, and date the promissory note
Notes Receivable
Both the items of Notes Payable and Notes Receivable can be found on theBalance Sheet of a business. While Notes Payable is a liability, Notes Receivable is an asset. Notes Receivable record the value of promissory notes that a business owns, and for that reason, they are recorded as an asset. NP is a liability which records the value of promissory notesthat a business will have to pay. This is analogous toaccounts receivable vs. accounts payable.
Additional Resources
CFI’s mission is to help anyone in the world become a confident financial analystthrough the CFI Financial Modeling & Valuation Analyst (FMVA)® credential program. To continue learning and advancing your career, these additional CFI resources will be helpful:
FAQs
Notes payable: Essentially a written promise to pay a specific amount of money at a specified future date or on demand, these debts can be short or long-term and usually involve formal written contracts with banks, credit companies, or other financial institutions.
What is the difference between accounts payable and notes payable? ›
Accounts payable refers to short-term liability accounts incurred for purchases with vendors and suppliers on credit. Notes payable are long-term liability accounts incurred through financing by banks and other lending institutions.
What is another name for notes payable? ›
A note payable is also known as a loan or a promissory note.
What is the journal entry for notes payable? ›
As you repay the loan, you'll record notes payable as a debit journal entry, while crediting the cash account. This is recorded on the balance sheet as a liability. But you must also work out the interest percentage after making a payment, recording this figure in the interest expense and interest payable accounts.
What is a short-term note payable? ›
A short-term note payable is a debt created and due within a company's operating period (less than a year). Some key characteristics of this written promise to pay (see (Figure)) include an established date for repayment, a specific payable amount, interest terms, and the possibility of debt resale to another party.
What is an example of a note payable? ›
Notes payable example
To buy new furniture, the company applies for a loan from a bank. The bank approves the loan and issues the company a promissory note with the details of the loan, like interest rates and the payment timeline. On its balance sheet, the company records the loan as notes payable.
Where do notes payable go on a balance sheet? ›
Notes payable appear as liabilities on a balance sheet. Additionally, they are classified as current liabilities when the amounts are due within a year. When a note's maturity is more than one year in the future, it is classified with long-term liabilities.
Is notes payable the same as receivable? ›
Notes Receivable vs Notes Payable
Notes Payable is a liability as it records the value a business owes in promissory notes. Notes Receivable are an asset as they record the value that a business is owed in promissory notes.
Is notes payable the same as debt? ›
What is Notes Payable? Notes payable refer to debt or other borrowing on the balance sheet. Generally, they are of a longer-term nature, greater than 12 months. Like accounts payable, they are a liability on the balance sheet.
Is a note payable a debit or credit account? ›
Notes Payable is a liability (debt) account that normally has a credit balance. When money is borrowed from the bank, the accountant will debit the Cash account to reflect the increase in the amount of cash and credit the Notes Payable account to show the corresponding debt.
If your company borrows money under a note payable, debit your Cash account for the amount of cash received and credit your Notes Payable account for the liability. When you repay the loan, you'll debit your Notes Payable account and credit your Cash account.
What are the key events with notes payable? ›
- Business.
- Accounting.
- Accounting questions and answers.
- What are the key events with notes payable? ( Check all that apply.) Establishing the note Recording interest paid Accruing interest incurred but not paid Jay Recording the use of the funds Recording principal paid Recording interest received.
Adjusting Entries – Liability Accounts. Notes Payable is a liability account that reports the amount of principal owed as of the balance sheet date. (Any interest incurred but not yet paid as of the balance sheet date is reported in a separate liability account Interest Payable.)
What is a short-term note payable usually? ›
Short-term Notes Payable: These have repayment terms of less than one year. They are often used for working capital needs or to finance seasonal operations. Long-term Notes Payable: These have repayment terms of more than one year.
Are notes payable to decrease a debit or credit? ›
As you repay the loan, you'll record notes payable as a debit journal entry, while crediting the cash account. This is recorded on the balance sheet as a liability.
Can notes payable be long-term? ›
Notes payable are long-term liabilities that indicate the money a company owes its financiers—banks and other financial institutions as well as other sources of funds such as friends and family. They are long-term because they are payable beyond 12 months, though usually within five years.
What is a major difference between accounts payable and notes payable quizlet? ›
A major difference between Accounts Payable and Notes Payable is that: only Accounts Payable are classified as current assets. only Notes Payable charge interest.
How notes payable differ from accounts payable in terms of formality of agreement? ›
Accounts payable agreements are less formal than notes payable; there are usually no legal contracts involved and only the specific cost of the goods or services provided will be owed. As long as buying companies make invoice payments on time, there should be no additional late fees or penalties incurred.
What is the difference between accounts payable and bills payable? ›
Bills payable differ from accounts payable. Whereas bills payable refers to the actual invoices vendors send you as a request for payment, the accounts payable is an account category in the general ledger that records current liabilities.
What is the difference between notes receivable and accounts payable? ›
Notes Receivable vs Notes Payable
Notes Payable is a liability as it records the value a business owes in promissory notes. Notes Receivable are an asset as they record the value that a business is owed in promissory notes.
