Notes Payable

Companies record obligations in the form of written promissory notes, called notes payable. Notes payable are generally utilized instead of the accounts payable since provide the lender an evidence or proof, so that it could be used as a legal remedies, if the borrower fail to pay the debt  and to collect the money. Notes payable generally need the borrower to pay the interest. Most of business organizations often issue promissory notes in order to meet their short-term financing requirements. Promissory notes are issued for different periods. Those due for the payment within one year of the balance sheet date are called as current liabilities.

In accounting notes payable is also called as promissory note or note, is a written unconditional promise, signed by the make or company, to pay to the bearer or to the order of the name payee a certain sum in money on demand or at a fixed or determinable future time. If such notes meets all the requirements conditioned the above definition, it is said to be negotiable. Under law it may be passed freely from one person to another by endorsement-meaning that the payee or present owner signs his name on the back of the note. Unless such a signature is expressly stated to be “without re-course,” the indorsee, that is, the person to whom the note is transferred, can hold his immediate indorser and all previous indorsers liable for its payment in case of the maker note fails pay it at maturity. Thus a contingent liability is imposed upon the indorser of a note, of which the accountant should take full note.  The terms of the note generally consists of the interest rate (if any), the principal amount, the date, the parties, the maturity date and the terms of repayment (that can include interest).

Questionnaire:

• What is notes payable?
• Why notes payable is called as a negotiable instrument?
• What are the contents included in the promissory notes?