Notes Payable
A formal written promise to repay a specific amount of money by a set date, recorded as a liability on the balance sheet.
What is Notes Payable?
Notes payable are written promissory notes in which a company formally agrees to repay a specified principal amount plus interest by a defined maturity date. They are classified as either current liabilities (due within one year) or non-current liabilities (due beyond one year) on the balance sheet. Common forms include bank loans, lines of credit, and privately placed debt instruments. Notes payable differ from accounts payable, which are informal trade obligations without a signed debt instrument. The interest expense on notes payable is recognized on the income statement, while the principal balance is shown on the balance sheet.
Example
A manufacturing company draws $5 million from its bank line of credit to fund seasonal inventory purchases, signing a promissory note with a 6% annual interest rate due in 18 months. It records $5 million in notes payable on the balance sheet — $0 in current and $5 million in non-current at inception, then reclassifies $5 million to current liabilities six months before maturity. Each month it accrues $25,000 in interest expense (6% × $5M ÷ 12), increasing accrued liabilities until the interest is paid.
Source: Investopedia — Notes Payable