Definition of Notes Payable
In accounting, Notes Payable is a general ledger liability account in which a company records the face amounts of the promissory notes that it has issued. The balance in Notes Payable represents the amounts that remain to be paid. Since a note payable will require the issuer/borrower to pay interest, the issuing company will have interest expense. Under the accrual method of accounting, the company will also have another liability account entitled Interest Payable. In this account the company records the interest that it has incurred but has not paid as of the end of the accounting period.
For most companies the amounts in Notes Payable and Interest Payable are reported on the balance sheet as follows:
- the amount due within one year of the balance sheet date will be a current liability, and
- the amount not due within one year of the balance sheet date will be a noncurrent or long-term liability.
The company should also disclose pertinent information for the amounts owed on the notes. This will include the interest rates, maturity dates, collateral pledged, limitations imposed by the creditor, etc.
Examples on Notes Payable
Notes payable are required when a company borrows money from a bank or other lender. Notes payable may also be part of a transaction to acquire expensive equipment. In certain cases, a supplier will require a note payable instead of terms such as net 30 days.