You may have found the term Notes Payable in the Liabilities section of a balance sheet. In this example, Company A records a debt receivable entry on its balance sheet, while Company B records a debt receivable entry on its balance sheet.
However, a promissory note could also be used when a company is unable to pay one of its suppliers as agreed.
When a company borrows money (usually from banks and lending institutions), it is required to sign a legal document called a promissory note. When a company borrows money on a note payable, it debits the amount of cash received into a cash account and credits a promissory note account to record the liability.Often, if the amount of notes payable is minimal, financial models will consolidate accounts payable and promissory notes, or group notes payable under other current liabilities. The person or organization that is entitled to receive the money when the promissory note expires is known as a lender or creditor and records that amount in an asset account, such as promissory notes. In general, a company's Payable Bonds incur interest (however, there are also non-interest bearing Bonds). This causes the company to replace its account payable with a note payable and the supplier replaces its account receivable with a note receivable.
When the customer refunds the amount of the promissory note with interest, the provider credits the original amount to the receivable account, credits the interest received to the interest account and debits the cash account the total amount repaid. Or because it's backed by a legal document called a promissory note (in fact, the name “promissory note” comes from the vital role the promissory note plays in the lending process. Alternatively, if the promissory note is signed in exchange for goods, the supplier debits the receivables account and credits the sales account. The entry in the promissory note journal is recorded by debiting the account receiving the security, usually the cash account, and crediting the promissory note account.
Promissory notes are a balance sheet item that records the value of the notes that are owed to a company and for which it must receive payment. The creator of the promissory note is known as the borrower or debtor and records the amount owed in a liability account, such as promissory notes. When repaying the borrowed amount plus interest, the total amount repaid is credited to the cash account, and the interest-bearing journal entry is debited to the interest expense account and the original borrowed amount is debited to the promissory note account. It is not unusual for a company to have both an obligation receivable account and a note payable account in its statement of financial position.
