Notes payable are a liability account on a company’s balance sheet.
Written By Kevin Mil - Author/Founder
What type of account is Notes payable?
Notes payable are a liability account on a company’s balance sheet, representing formal written promises to pay a specific amount of money at a future date.
These notes typically involve interest payments over a set period and can arise from transactions such as purchasing goods on credit, borrowing money, or refinancing existing debt.
Unlike accounts payable, which are usually short-term obligations without a promissory note, notes payable can be either short-term (due within a year) or long-term (due after a year), depending on the terms of the note.
Is a note payable an asset or liability?
Notes payable is classified as a liability because it represents a company’s obligation to repay borrowed funds.
This obligation typically includes interest and comes with a specific repayment date.
Since the company is required to make this payment in the future, it is recorded as a future economic outflow.
As a result, notes payable appears as a liability on the balance sheet.
Are notes payable current or non-current?
Notes payable can be either current or non-current, depending on the maturity date of the note.
This date marks when the company must repay the loan.
If the maturity date falls within one year or less, the notes payable are classified as a current liability.
On the other hand, if it’s beyond one year, they are classified as a non-current liability.
The distinction is crucial because it impacts how the company presents its financial information on the balance sheet and in financial statements.
Specifically, current liabilities are typically listed in the order of maturity, while non-current liabilities are reported separately with a note explaining the expected payment period.
Is a note payable a debit or credit account?
The notes payable account, classified as a liability, carries a credit balance.
This balance decreases through payment, where the account is debited.
For instance, when a company enters into a written agreement to pay a specific amount at a future date, it receives money in return.
Upon receiving this money, the company records the entry as a debit in the Cash in Bank account and a credit in the Notes Payable account.
Illustrations of notes payable
- A company, XYZ Inc., enters into a written agreement to purchase a piece of equipment for $100,000, payable in 6 months with an interest, rate of 5%, a promissory note. Borrower’s Journal entry: Debit Equipment ($100,000), Credit Notes Payable ($100,000).
- A customer, ABC Corp., purchases a product from a company with a 60-day payment term. The customer agrees to pay $50,000 in 60 days. Borrower’s Journal entry: Debit Inventory ($50,000), Credit Notes Payable ($50,000).
Note we left out the interest expense in the illustrations.