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On the balance sheet, you can find the notes payable account in the liabilities section. It may exist in the current liabilities section or, in the non-current liabilities, depending on their maturity.
Notes payable definition
Notes payable is a written agreement when the company borrows some money from the lender. For example, companies borrow money from banks. The bank will ask the company to sign a formal loan agreement before the bank gives money. The company will record this loan in a notes payable account.
The company must repay the loan principal plus interest for a specified period. The rate can be fixed or floating interest, according to the agreement. If it is floating rate, it varies and is usually equal to the prime rate plus a premium.
Furthermore, lenders may require other restrictions. For example, a company shouldn’t pay dividends to investors, while part of the loan is still unpaid. If it violates, the lender has the right to call a loan. Loan terms may also require collateral, such as company assets.
Reporting in financial statements
The company classifies notes payable under liabilities. If maturity is less than 12 months or an accounting period, the company recorded it in the current liabilities. Meanwhile, for more than 12 months, the account will be in the part of non-current liabilities.
Furthermore, if long-term notes are maturing less than one year, the company reports in the current liabilities section. The rest, the company reports as non-current liabilities.
For example, as of January, from the note payable due in the next year of Rp100, Rp10 will be due at the end of this year. Thus, the company will record a nominal Rp10 on the current liabilities section, and the rest goes to the non-current liabilities (RP90).
Its difference with accounts payable
You can find accounts payable and notes payable in the liabilities section. Here I present the difference between the two.
Notes payable
- Have a formal agreement before the lender’s hands over the money.
- More detailed requirements. The agreement will cover loan terms, including interest rates, maturity, principal, other conditions, such as when the agreement is breached.
- Can be a current liability or non-current liabilities, depending on the maturity.
- Lenders charge interest on loans.
- Arise when a company borrows money
- The lender has a claim on the borrower’s assets if the company fails to repay the loan.
Accounts payable
- Has no formal written promise to pay. The company records it when buying goods from suppliers on credit.
- Less detailed requirements. The supplier will issue a sales invoice when sending goods. The invoice contains the number and terms of credit, such as 90 days. This requirement is less specific compared to notes payable.
- When the company has received the goods, it will match the purchase order with the sales invoice. If it is appropriate, the company records it as accounts payable as long as it has not been paid in cash.
- Is part of current liabilities. It has a maturity of less than one year.
- Do not involve interest, therefore, not an interest-bearing debt.
- Appears when companies buy goods or services on credit.
- Accounts payable are not binding, and delays only cause companies to incur penalties.
