notes payable
Sometimes an informal 'pay me back when you can' is not enough, and someone wants a signed promise. If you borrow money from a bank or a serious supplier, they will often ask you to sign a document stating exactly how much you owe, the interest rate, and the date you must pay. That signed promise, from the borrower's side, becomes a note payable.
A note payable is a written, formal promise (a promissory note) to repay a specific amount of money, usually with interest, by a stated date. Unlike accounts payable — which rests on an invoice and customary terms — a note is a legal IOU with explicit terms. If a company signs a 100,000 note at 6 percent annual interest due in one year, it owes 100,000 of principal plus 6,000 of interest, for 106,000 at maturity. Notes can be short-term (current liability) or long-term (non-current), and the interest accrues over time as an expense even before it is paid.
Notes payable show up when a business borrows from a bank, finances equipment, or converts an overdue account payable into a formal note. They matter because they carry interest (unlike most ordinary payables) and legal obligations, so missing a payment has firmer consequences. Accountants must record not only the principal but also accrued interest expense each period, matching the cost of borrowing to the time the money was used.
On July 1 a company signs a 60,000 note payable at 8 percent due in one year. By December 31 it has used the money for six months, so it accrues interest of 60,000 x 8 percent x 6/12 = 2,400 as interest expense and interest payable, even though no cash has changed hands yet.
Interest is earned by the lender — and owed by the borrower — with the passage of time, not only on the payment date.
The mirror image on the lender's books is notes receivable; the same note is a liability for the borrower and an asset for the lender.