What is Notes Payable?
Notes payable is a promissory note that is offered by the lender to the borrower for an agreement between these two wherein the borrower is bound to pay a certain amount to the lender within a stipulated time period along with an interest.
Types of Notes Payable on Balance Sheet
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For eg:
Source: Notes Payable (wallstreetmojo.com)
There are two types –
Short-Term Notes Payable
Firstly, the company puts notes payable as a short-term liability. The company puts it as a short-term liability when the duration of that particular note payable is due within a year. As we see from the above example, CBRE has a current portion of notes of 133.94 million and $10.26 million in 2005 and 2004, respectively.
Long-Term Notes Payable
On the other hand, if the note payable is due after 12 months or more, This is considered as a long-term liability. As an example, CBRE has long-term payable of 106.21 million and $110.02 million in 2005 and 2004, respectively.
In the next section, we will see how to pass journal entries.
Notes Payable Journal entries
It is important to understand the journal entries for notes payable. Doing so will enable an individual to comprehend the nitty-gritty.
Let’s get started.
Please note that the entry is being recorded in the journal of the payee (meaning who is entering the notes on the balance sheet, meaning the customer).
The first entry would be –
Cash A/C ………………..Dr 1000 –
To Notes Payable A/C ….Cr – 1000
Here we have passed this entry in the books of the customers because it indicates that the customer has borrowed the money in lieu of the notes payable.
Here, we have debited cash because cash is an asset. And when we receive cash, the asset gets increased. When an asset gets increased, we debit the account. At the same time, we credited it because it is a liability. As a liability, it gets increased. When liabilities get increased, we credit the account.
The next entry would be an entry for interest expenses.
From the customer’s point of view, the interest payment is an expense; but the customer is yet to pay the interest. So here’s the journal entry we will pass in the books of accounts of the customer –
Interest expense A/C ………………..Dr 150 –
To Interest PayableInterest PayableInterest Payable is the amount of expense that has been incurred but not yet paid. It is a liability that appears on the company's balance sheet.read more A/C ….Cr – 50
To Cash A/C…………………Cr – 100
In this journal entry, we have debited interest expense. Interest expense is an expense. When the expense increases, we debit the account. At the same time, we have credited interest payable. Why? Because interest expense is not yet being paid off in full. That’s why we’re treating it as a liability. When liability increases, we credit the account. Here the company has paid off part of the interest; that’s why we credited cash account because when asset decreases, we credit the account.
Then, there would be a journal entry when the amount would be paid in full along with interest payable.
In this case, we will pass the following journal entry –
Notes Payable A/C ………………….Dr 1000 –
Interest payable A/C ………………..Dr 50 –
To Cash A/C ….Cr – 1050
Please note that the above journal entry will be passed only at the time of paying off the entire amount.
Here, we will debit it because there will be no liability anymore once the full amount is being paid off. We will also debit the interest payable because a portion of interest was due, but not now.
And we are crediting the cash account because cash as an asset is going out of the company. Since cash is an asset, when it decreases, we will debit the account.
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