Notes payable

Definition

Notes payable are written promises to pay a certain amount of money at a future date, often with interest. They can be classified as either current or noncurrent liabilities depending on their due dates.

5 Must Know Facts For Your Next Test

1. Notes payable are recorded as liabilities on the balance sheet.
2. Interest expense associated with notes payable is recognized in the income statement.
3. Current notes payable are due within one year, while noncurrent notes payable have a longer maturity period.
4. The issuance of notes payable increases cash or other assets and creates a liability for the amount borrowed.
5. Repayment of the principal amount reduces the notes payable account.

Review Questions

• How are notes payable classified on the balance sheet based on their maturity?
• What financial statement includes interest expense related to notes payable?
• What happens to the balance sheet when a company issues a note payable?

Related terms

accountsPayable: Amounts a company owes to suppliers for items or services purchased on credit.

interestExpense: The cost incurred by an entity for borrowed funds, reported on the income statement.

liabilities: Financial obligations that a company owes to external parties.