Notes Payable

Definition of Notes Payable

When a company issues promissory notes, it maintains the records of the amount of promissory notes issued in a ledger account. Such an account is termed Notes Payable. Under these, the lender lends the money at an agreed interest to a borrower who promises to pay back the amount within a stipulated time or on a pre-decided date.

Difference between Notes Payable and Accounts Payable

Notes payable are different from accounts payable. In accounts payable, there is no need to issue promissory notes or to pay interest on the amount borrowed. Whereas in the case of notes payable, the borrower is required to pay interest on the principal amount borrowed apart from the need to issue promissory notes.

Notes Payable

Classification of Notes Payable

They can be classified as short-term and long-term:

  • Short-term notes payable are those promissory notes which are due for payment within 12 months from the date of issue. On the balance sheet, these are represented as short-term liability.
  • Long-term notes payables are promissory notes which are due for payment after 12 months from the date of issue. They are classified as a long-term liability on the balance sheet.

Notes Payable Example  

X Ltd. borrows 5,00,000 at an interest rate of 10% from DZB Bank under notes payable. The borrowed amount will be paid to the bank on a specified date. The accounting entries in the books of X Ltd. on receiving of cash shall be:

Particulars Dr. AmountCr. Amount
Cash 5,00,000
To Notes Payable 5,00,000

When the interest to be paid on the borrowed amount accrues, the following entry shall be passed in the books of X Ltd.:

Particulars Dr. AmountCr. Amount
Interest expense50,000
To Interest payable50,000

Upon payment of interest, X Ltd. shall record the entry as:

Particulars Dr. AmountCr. Amount
Interest payable 50,000
To Cash50,000

When X Ltd. pays the amount borrowed from DBZ bank, the following entry shall be passed:

Particulars Dr. AmountCr. Amount
Notes payable 5,00,000
To Cash5,00,000

Conclusion

Notes Payable is a ledger account prepared by an accountant for recording transactions that involve the borrowing of money. This is the most effective way of recording the transactions relating to the amount borrowed and on which interest is to be paid. The future planning of the business depends on the information provided in the notes payable account.



Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

3 thoughts on “Notes Payable”

  1. This article will definitely help me to understand notes payable well. Thanks for sharing this article. This is very comprehensive and helpful. I will share this to my business owners as well.

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  2. This article will definitely will definitely help me to understand Notes Payable. I think that this will definitely help me to do my business accounting faster and easier. Thanks for sharing this article.

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  3. Very informative context, I did indulge a little and had to make sure I understood the context but it was splendid.

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