Definition of Note Payable and Bond Payable
For accounting purposes, a note payable and a bond payable have the following similarities:
- Formal written promises to pay interest and to repay the principal amount or maturity amount on specified future dates
- Reported as liabilities
- Interest is accrued as a current liability
- Principal that is due within one year of the balance sheet date is reported as a current liability (unless there is a bond sinking fund or a formal agreement for refinancing the debt with new long-term debt or stock.)
- Principal due after one year is reported as a long-term liability
Example of Note Payable and Bond Payable
Assume that a corporation recently borrowed $200,000 in the form of a note payable due in two years with interest of 8% per year paid quarterly. In addition, it recently issued a $2,000,000 6% bond payable due in 10 years with interest paid semiannually. Both the note payable and the bond payable are to be reported as long-term (noncurrent) liabilities on the corporation’s balance sheet. Any interest that has accrued but was not paid as of the balance sheet date is to be reported as a current liability such as Accrued Expenses Payable. On the corporation’s income statements, the interest that occurred (whether paid or not paid) during the period of the income statement will be reported as interest expense.
