Notes Payable

A written agreement to repay the lender a certain amount of cash

What is Notes Payable?

Notes Payable is a written agreement (a promissory note) 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.

The following information is contained in a note payable:

  • 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

 

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. However, when the amounts are not due within one year, notes payable are classified as long-term liabilities.

An example of different accounts on a balance sheet:

 

Balance Sheet

 

Notice how notes payable can be short-term and/or long-term in nature.

 

Example

John borrows $100,000 from Michelle on January 1, 2017. 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:

 

Journal Entries

 

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, have no interest, and is a short-term liability (usually paid within a month).

 

Notes Payable

Notes payable is a written agreement (a promissory note) in which the borrower obtains a specific amount of money from the lender and promises to pay the amount owed with interest over a specific 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 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

 

Additional Resources

Thank you for reading this guide.  CFI’s mission is to help anyone in the world become a confident financial analyst through the CFI Financial Modeling & Valuation Analyst credential program.   To continue learning and advancing your career, these additional resources will be helpful:

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