Written agreements to repay the lender a certain amount of cash
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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.
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 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).
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
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
Both the items of Notes Payable and Notes Receivable can be found on the Balance 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 notes that a business will have to pay. This is analogous to accounts receivable vs. accounts payable.
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