Notes Payable

You may have come across the term Notes Payable in the Liabilities section of a Balance Sheet.

Like people, Businesses need money for various purposes (Expansion, purchase of new machinery, making an acquisition and so on).

Often, to fulfill its needs, the business borrows money from outside parties.

When a Business owes someone money, they have essentially created a Liability for themselves since the amount needs to be repaid at a later date.

But, not all borrowings are the same.

Due to the different nature of borrowings - they are classified differently in the Balance Sheet.

These borrowings are reflected in the Liabilities section of the Balance Sheet in the form of a Payable (Accounts Payable, Notes Payable, Other Payables being a few examples).

In a Business, a Note Payable is a 'special form' of I.O.U. from the Business to someone else.

Notes Payable is a 'special form' of I.O.U because it is backed by a legal document called a Promissory Note (In fact, the name 'Notes Payable' comes from the vital role the Promissory Note plays in the lending process.)

When a Business borrows money (usually from banks and lending institutions), it is required to sign a legal document called a Promissory Note.

The Promissory Note is a written Promise made by one party (called the note maker) to the other party (the note payee) for a certain amount of money by a specified date.

The Promissory Note makes the Notes Payable borrowings distinct from other typical borrowings of a business (such as borrowing from its suppliers which are usually classified as 'Account Payable' on the Balance Sheet and are not accompanied by a Note).

In the Financial Statements of a Business, a Note Payable is a Liability since it is the amount a Business owes to someone else.

Based on the amount of time this money has been borrowed - you may see the borrowed amount in the Short Term Liabilities section or the Long-Term Liabilities section.

Short-term Notes payable are typically expected to be paid within the year (Example: A 6-month Term Loan).

Long-Term Notes Payable are longer in nature and typically reflect debt which is over a year (Example: A 10-year loan that the company takes to buy new equipment).