The issuing corporation will incur interest expense since a note payable requires the issuer/borrower to pay interest. Notes payable include terms agreed upon by both parties—the note’s payee and the note’s issuer—such as the principal, interest, maturity (payable date), and the signature of the issuer. The face of the note payable or promissory note should show the following information. Since it is evident that notes payable is not an asset, is it a liability?

• The purpose of issuing a note payable is to obtain loan form a lender (i.e., banks or other financial institution) or buy something on credit.
• Notes payable often, referred to as promissory notes, are financial instruments used when borrowing and lending money.
• This will include the interest rates, maturity dates, collateral pledged, limitations imposed by the creditor, etc.
• 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.

This article aims to answer the question ‘is notes payable asset or liability? We will be discussing notes payable, asset, and liability accounts to understand their features in accounting in order to ascertain why notes payable is not an asset but a liability. It is not unusual for a company to have both a Notes Receivable and a Notes Payable account on their statement of financial position. Notes Payable is a liability as it records the value a business owes in promissory notes.

Notes Payable Journal Entry

The first journal is to record the principal amount of the note payable. Accounts payable are always considered short-term liabilities which are due and payable within one year. The proper classification of a note payable is of interest from an analyst’s perspective, to see if notes are coming due in the near future; this could indicate an impending liquidity problem.

• Notes Receivable are an asset as they record the value that a business is owed in promissory notes.
• There are many other various types of notes that are issued by governments and companies, many of which have their own characteristics, risks, and features.
• Municipal notes are a way for governments to raise money to pay for infrastructure and construction projects.
• The discount simply represents the total potential interest expense to be incurred if the note remains’ unpaid for the full 120 days.
• Accounts payable is an obligation that a business owes to creditors for buying goods or services.
• Note Payable is credited for the principal amount that must be repaid at the end of the term of the loan.

However, if the balance is due within a year, promissory notes on a balance sheet might be listed in either current liabilities or long-term obligations. When a company takes out a loan from a lender, it must record the transaction in the promissory notes account. The borrower carrying amount formula will be requested to sign a formal loan agreement by the lender. It is important to realize that the discount on a note payable account is a balance sheet contra liability account, as it is netted off against the note payable account to show the net liability.

Notes Payable: Explanation

Notes payable is not an asset because it is not a resource of economic value that the business owns. Often, a business will allow customers to convert their overdue accounts (the business’ accounts receivable) into notes receivable. Simply subtracting any payments already made from the total amount of notes payable can also show the current balance of notes payable or the portion of the borrowing still owed.

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Issuers of unsecured notes are not subject to stock market requirements that force them to publicly avail information affecting the price or value of the investment.

Other Types of Notes

Notes payable are written agreements (promissory notes) in which one party agrees to pay the other party a certain amount of cash. In this example, Company A records a notes receivable entry on its balance sheet, while Company B records a notes payable entry on its balance sheet. The principal value is $300,000, $100,000 of which is to be paid monthly.

In this journal entry, the company debits the interest payable account to eliminate the liability that it has previously recorded at the period-end adjusting entry. Hence, without properly account for such accrued interest, the company’s expense may be understated while its total asset may be overstated. Of cause, if the note payable does not pass the cut off period or the amount of interest is insignificant, the company can just record the interest expense when it makes the interest payment.

Short-Term Note Payable – Discounted

If it’s located as a record under a category called “long-term liabilities,” it means the loan is set to mature after one year. The company makes a corresponding “furniture” entry in the asset account. Borrowing accounted for as notes payable are usually accompanied by a promissory note. A promissory note is a written agreement issued by a lender stating that a borrower will pay the lender the debt it owes on a specific date with interest.

For example, Euro notes are the legal tender and paper banknotes used in the eurozone. Euro notes come in various denominations, including five, 10, 20, 50, and 100 euros. At Ablison.com, we believe in providing our readers with useful information and education on a multitude of topics. However, please note that the content provided on our website is for informational and educational purposes only, and should not be considered as professional financial or legal advice.

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. It is a liability account on the maker’s balance sheet that reflects the amount owed under the terms of the promissory note that was issued. Hence, notes payable is an account reported under the liabilities section of the balance sheet.

Issuing notes payable is not as easy, but it does give the organization some flexibility. For example, if the borrower needs more money than originally intended, they can issue multiple notes payable. A business may borrow money from a bank, vendor, or individual to finance operations on a temporary or long-term basis or to purchase assets. Note Payable is used to keep track of amounts that are owed as short-term or long- term business loans. On promissory notes, interest always needs to be reported individually. In this illustration, the interest rate is set at 8% and is paid to the bank every three months.

This is because this account reflects the money that is owed by a note maker under the terms of an issued promissory note. In summary, Notes Payable represents money owed by a company that is formalized through written agreements or promissory notes. This liability is an integral part of a company’s financial structure, impacting its liquidity, creditworthiness, and overall financial health. Effective management and accurate accounting of notes payable are crucial for a company’s operational and financial success. The date of receiving the money is the date that the company commits to the legal obligation that it has to fulfill in the future. Likewise, this journal entry is to recognize the obligation that occurs when it receives the money from the creditor after it signs and issues the promissory note to the creditor.