1. Summary
  2. Notes Payable
  3. Notes payable Journal Entry
  4. Notes payable vs. Accounts payable
  5. Notes Payable vs. Short-run Debt
  6. Notes Payable vs. Interest Payable


Notes collectible may be a liability account written up as a part of a company’s book of account. It’s wherever borrowers record their written guarantees to repay lenders. Against this, the loaner would record this same written promise in their notes owed account.

Any written note enclosed within the notes collectible account ought to embrace basic data regarding the debt, as well as factors like:

  • Principal quantity
  • Due date
  • Interest owed
  • Collateral pledged
  • Creditor limitations

These are marked down in an exceedingly formal note. Whether or not or not the note is assessed as a current or long liability can depend upon the day of the month. Notes due inside the future twelve months are thought to be current or short-run liabilities, whereas notes due once one year are long or non-current liabilities.

Notes Payable

A note may be a written promissory note. Under this agreement, a receiver obtains a selected quantity of cash from a loaner and guarantees to pay it back with interest over a present fundamental measure. The rate of interest is also mounted over the lifetime of the note or varies in conjunction with the rate of interest charged by the loaner to its best customers (known because of the prime rate). This differs from Associate in Nursing liability, wherever there’s no note, neither is there, a rate of interest to be paid (though a penalty is also assessed if payment is created once a delegated due date).

Notes payable Journal Entry

If an organization borrows capital underneath a note, the brokerage account is debited for the quantity received on the ledger.

On the opposite hand, the notes collectible account is attributable to account for the liability.

From the attitude of the corporate, the disbursal due on the notes collectible is debited whereas the interest collectible account is attributable.

Once paid, the interest collectible account is debited, and also the brokerage account is attributable.

At maturity, the notes collectible account is debited (i.e. the first amount), and also the compensative entry may be a credit to money.

Notes payable vs. Accounts payable

Similar to accounts collectible, notes collectible is external supply of funding (i.e. money influx till the date of repayment).

By distinction, accounts collectible may be a company’s accumulated owed payments to suppliers/vendors for products or services already received (i.e. invoice was processed).

However, the distinction between the 2 is that notes collectible carries a lot of a “contractual” feature that we’ll expand upon within the resultant section.

Unlike notes collectible, accounts collectible doesn’t have incidental interest nor is there usually a strict date by that payment should be created.

Nevertheless, some suppliers can charge corporations fines for late payments, or discontinue their relationship if deemed acceptable.

Often, if the quantity of notes collectible is negligible, money models can consolidate accounts collectible and notes collectible, or cluster notes collectible into the opposite current liabilities item.

Notes Payable vs. short-run Debt

Notes payable is comparatively like short-run debt in this each is:

  • Reported on the record as a current liability – however, may also be a long liability if the maturity is on the far side one year from the date the first capital was provided
  • The maturity amount as per the contract – the obligations of the receiver should be met by the desired due date, as an alternative, the receiver is in technical default
  • Interest expense is charged on the quantity borrowed across the disposition term
  • Lenders typically elicit collateral by looking at the borrower’s default risk, therefore if the receiver goes bankrupt, the loaner incorporates a right to the assets of the receiver – however debt lenders are a lot higher in terms of priority
  • Some lenders may even impose covenants that need the receiver to keep up sure money ratios and forestall such actions (e.g. M&A, dividends) to attenuate their drawback risks

Notes Payable vs. Interest Payable

If an organization uses the accruement technique of accounting, notes collectible can got to be supplemented with interest collectible accounts. This can be as a result of a note that needs the receiver to pay interest, making an extra disbursal. Within the interest collectible account, an organization records any interest incurred throughout the accounting amount that has not nonetheless been paid.