Notes Payable: Accounting, Meaning, Liability, Examples

You might think of G – I – R – L – trial balance S when recalling the accounts that are increased with a credit. You might think of D – E – A – L when recalling the accounts that are increased with a debit. HighRadius stands out as an IDC MarketScape Leader for AR Automation Software, serving both large and midsized businesses. The IDC report highlights HighRadius’ integration of machine learning across its AR products, enhancing payment matching, credit management, and cash forecasting capabilities. After borrowing $15,000 and accruing interest of $600 over 6 months, and having already repaid $4,000, XYZ Company still owes $11,600 as Notes Payable. The content provided on accountingsuperpowers.com and accompanying courses is intended for educational and informational purposes only to help business owners understand general accounting issues.

• In this way, the $10,000 paid at maturity (credit to Cash) will be entirely offset with a $10,000 reduction in the Note Payable account (debit).
• In this journal entry, both total assets and total liabilities on the balance sheet of the company ABC increase by $100,000 as at October 1, 2020.
• National Company prepares its financial statements on December 31, each year.
• If you have ever taken out a payday loan, you may haveexperienced a situation where your living expenses temporarilyexceeded your assets.
• When a specific account is identified as uncollectible, the Allowance for Doubtful Accounts should be debited and Accounts Receivable should be credited.
• In accounting, notes payable is recorded as a credit because it increases liabilities.

Issued Notes Payable for cash

Understanding the nuances between notes payable and short-term debt allows businesses to more accurately assess financial obligations, plan for cash flow, and communicate clearly with investors or auditors. Finance leaders often use automation tools or ERP systems to track maturity dates, manage interest payments, and forecast the impact of these liabilities on their balance sheet. This classification is important for understanding a company’s financial obligations, liquidity, and overall risk profile. Notes payable appears on the balance sheet under liabilities, distinct from accounts payable, which typically involves informal trade credit. Unlike Remote Bookkeeping accounts payable, notes payable involve formal loan agreements and often include interest and structured repayment terms.

Balance

In accounting, notes payable is recorded as a credit because it increases liabilities. When a company borrows money through a note, it debuts cash and credits notes payable. This entry shows an increase in available funds and a new obligation to repay. It’s important to record this correctly to ensure your balance sheet notes payable journal entry reflects true liabilities.

• An amortized note involves making regular payments (monthly, quarterly, etc.) that cover both the interest and a portion of the principal.
• For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
• Suppose a company wants to buy a vehicle & apply for a loan of $10,000 from a bank.
• It differs from Accounts Payable, which is used when firms purchase goods and services from the other party on credit and expect to pay for them later.
• Likewise, lenders record the business’s written promise to pay back funds in their notes receivable.

Loan/Note Payable (borrow, accrued interest, and repay)

It ensures compliance, transparency, and reliability in financial reporting, which are essential for maintaining stakeholder trust and achieving long-term financial stability. In this case, we can make the journal entry for the accrued interest on note payable by debiting the interest expense account and crediting the interest payable account. For each monthly payment, the journal entries will reflect the split between interest expense and the reduction of the principal balance.

• It is simply a reclassification that happens as the financial statements are being prepared (often on the worksheet).
• This journal entry will eliminate the $3,000 of interest payable that the company has recorded on Dec 31, 2020.
• Notes Payable are classified as ‘Current Liabilities’ if they’re due within a year, or ‘Non-Current Liabilities’ if due after a year.
• Debits and credits either increase or decrease an account, depending on the account.
• As you repay the loan, you’ll record notes payable as a debit journal entry, while crediting the cash account.
• A company selling merchandise on credit will record these sales in a Sales account and in an Accounts Receivable account.

Notes Payable Issued at a Discount

Whenever a business borrows money from any lender, it must be reported in the notes payable account. To illustrate how this works, imagine the following notes payable example. Notes payable is a liability account written up as part of a company’s general ledger. By contrast, the lender would record this same written promise in their notes receivable account. These accurate journal entries help maintain the balance sheet balance, enable precise tracking of liabilities (Notes Payable), cash movements, and accruing interest. Failure to make correct entries can misrepresent liabilities, inflate or deflate assets, and subsequently distort the financial health picture of the company.

Interest-bearing note payable example

It ensures transparency in financial reporting, establishes credibility with lenders, investors and shareholders, and keeps check on cash flows and profitability. Knowing the exact amount in liabilities allows businesses to strategise their repayment plans effectively, ensuring that they can maintain enough liquidity to meet their obligations and avoid any default. Moving forward, as the company pays off (fully or partially) the note, it needs to record the payment activity.

Relationship of Notes Payables to Other Accounts

By having many revenue accounts and a huge number of expense accounts, a company will be able to report detailed information on revenues and expenses throughout the year. Temporary accounts (or nominal accounts) include all of the revenue accounts, expense accounts, the owner’s drawing account, and the income summary account. Generally speaking, the balances in temporary accounts increase throughout the accounting year. At the end of the accounting year the balances will be transferred to the owner’s capital account or to a corporation’s retained earnings account. Ready to simplify how you manage notes payable and improve your AP performance? Continuing with the above example, let’s assume the loan company applied to buy that vehicle is from Bank of America.

Capital Borrowing Journal Entry (Debit, Credit)

This accounting treatment ensures that the company’s financial statements accurately reflect its liability and interest expense. Another situation requiring an adjusting journal entry arises when an amount has already been recorded in the company’s accounting records, but the amount is for more than the current accounting period. To illustrate let’s assume that on December 1, 2024 the company paid its insurance agent $2,400 for insurance protection during the period of December 1, 2024 through May 31, 2025. The $2,400 transaction was recorded in the accounting records on December 1, but the amount represents six months of coverage and expense. By December 31, one month of the insurance coverage and cost have been used up or expired. Hence the income statement for December should report just one month of insurance cost of $400 ($2,400 divided by 6 months) in the account Insurance Expense.