notes payable

Examples of notes payable in the following topics:

• Notes Payable

  • A note payable is a liability where one party makes an unconditional written promise to pay a specific sum of money to another.
  • When a note is signed and it becomes a binding agreement, a notes payable can be recorded to report the debt on the balance sheet.
  • The note payable amount can include the principal as well as the interest payment amounts due.
  • If periodic payments are made throughout the term of the note, the payments will reduce the notes payable balance.
  • It's important not to confuse a note with a loan contract, which is a legally distinct document from a note.

• Reporting Long-Term Liabilities

  • "Notes Payable" and "Bonds Payable" are also examples of long-term liabilities, and they often introduce an interesting distinction between current liabilities and long-term liabilities presented on a classified balance sheet.
  • Let's say Company X obtains a 100,000 Note Payable that requires 5 annual payments of 20,000 starting 1/1/14.
  • Despite a Note Payable, Bonds Payable, etc., starting out as a long-term liability, the portion of that debt that is due within a year has to be backed out of the long-term liability and reported as a current liability.
  • See below for the balance sheet reporting treatment of the current and long-term liability portions of the Note Payable from initiation to final payment.

• Issuing Bonds

  • On issuance, the journal entry to record the bond is a debit to cash and a credit to bonds payable.
  • Bonds differ from notes payable because a note payable represents an amount payable to only one lender, while multiple bonds are issued to different lenders at the same time.
  • On issuance, the journal entry to record the bond is a debit to cash and a credit to bonds payable.
  • Other journal entries associated with bonds is the accounting for interest each period that interest is payable.

• Classifying Liabilities

  • Example of current liabilities include accounts payable, short-term notes payable, commercial paper, trade notes payable, and other liabilities incurred in the normal operations of the business.
  • Some of these normal operating costs include salaries payable, wages payable, interest payable, income tax payable, and the current balance of a long-term debt that will be due within a single year.
  • These usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties.

• Defining Liabilities

  • Any type of borrowing from persons or banks for improving a business or personal income that is payable in the current or long term.
  • Types of liabilities found on a company's balance sheet include: current liabilities like notes payable, accounts payable, interest payable, and salaries payable.
  • Long-term liabilities have maturity dates that extend past one year, such as bonds payable and pension obligations.

• Components of a Note

  • Notes Receivable represents claims for which formal instruments of credit are issued as evidence of debt, such as a promissory note.
  • Maker-the maker of a note is the party who receives the credit and promises to pay the note's holder.
  • The maker classifies the note as a note payable.
  • Payee-the payee is the party that holds the note and receives payment from the maker when the note is due.
  • The payee classifies the note as a note receivable.

• Current Maturities of Long-Term Debt

  • Long-term liabilities are liabilities with a due date that extends over one year, such as a notes payable that matures in 2 years.
  • Examples of long-term liabilities are debentures, bonds, mortgage loans and other bank loans (it should be noted that not all bank loans are long term since not all are paid over a period greater than one year. ) Also long-term liabilities are a way for a company to show the existence of debt that can be paid in a time period longer than one year, a sign that the company is able to obtain long-term financing .
  • For example, a loan for which two payments of USD 1,000 are due--one in the next 12 months and the other after that date--would be split into one USD 1000 portion of the debt classified as a current liability, and the other USD 1000 as a long-term liability (note this example does not take into account any interest or discounting effects, which may be required depending on the accounting rules that may apply).
  • If the current liability section already has an accounts payable account (balance which is usually paid off in 30 days), the current portion of the loan payable (due within 12 months) would be listed after accounts payable.

• Reporting Current Liabilities

  • For example, accounts payable for goods, services, or supplies that were purchased with credit and for use in the operation of the business and payable within a one-year period would be current liabilities.
  • Accounts payable are typically due within 30 days.
  • Amounts listed on a balance sheet as accounts payable represent all bills payable to vendors of a company, whether or not the bills are more or less than 30 days old.
  • Therefore, late payments are not disclosed on the balance sheet for accounts payable.
  • An aging schedule showing the amount of time certain amounts are past due may be presented in the notes to audited financial statements; however, this is not common accounting practice.

• Bonds Payable and Interest Expense

  • Note that Valley does not need adjusting entries because the interest payment date falls on the last day of the accounting period.
  • The income statement for each of the 10 years (2010-2018) would show Bond Interest Expense of USD 12,000 (USD 6,000 X 2); the balance sheet at the end of each of the years (2010-2018) would report bonds payable of USD 100,000 in long-term liabilities.
  • The firm would report the USD 2,000 Bond Interest Payable as a current liability on the December 31 balance sheet for each year.

• Redeeming at Maturity

  • The journal entry to record the retirement of a bond: Debit Bonds Payable & Credit Cash.
  • If current assets will be used to retire the bonds, a Bonds Payable account should be listed in the current liability section.
  • On the balance sheet, the Bonds Payable account can be shown as different issues or consolidated into a single balance.
  • If a single balance is shown, then a schedule or note should disclose the details of the bond issues.
  • A description of bonds issued including the effective interest rate, maturity date, terms, and sinking fund requirements are included in the notes to financial statements.