Notes that are payable by an entity. Notes payable constitute a formal borrowing agreement, or promissory note, between an entity and a lender such as a bank, financial institution, among others. By nature, notes payable are usually classified as either a short-term or long-term liability, depending on the repayment terms set out in the contract. Notes payable may also arise as a result of a transaction to acquire economic resources (such as equipment) on credit.

In accounting, notes payable is a general ledger liability account which records the face amounts of the borrowed funds (by means of promissory notes that have been issued by an entity). Notes payable are associated with interest payments (by the issuer/ borrower), the issuer has to record interest expense. Under the accrual method of accounting, an issuing entity has to create another liability account known as “interest payable“. This account records the interest that the entity has incurred but has not paid as at the end of the accounting period.

The balance in “notes payable” represents the amounts that still have to be paid by the issuing entity. On the balance sheet, the balances in notes payable and interest payable accounts appear on the statement of financial position (balance sheet) as a current liability (if the amount is due within one year prior to the balance sheet date) or as a noncurrent or long-term liability (if the amount is not due within one year).