Notes payable are owed to a lender. In corporate accounting, notes payable reflect as a liability on company financial statements, since it is money due at some future point.
Notes payable operate under a written document like a contract. The company that is the debtor accounts for notes payable on its balance sheet. Balance sheets are company statements that indicate the financial state of the company at a specific point in time. Balance sheets show assets equal to liabilities plus shareholder value or equity. Notes payable are a liability and subtract from the total assets of the company.
Notes Payable Credit
By definition, balance sheets must balance, so entry of notes payable liabilities must balance as well. To account for a new note payable liability, a credit is entered into the notes payable account, which shows that the company borrowed more funds and increased company liability. When funds are received from loan proceeds, a debit appears in the notes payable account, which lowers the company asset value on the balance sheet.
Notes Payable Debit
Debits to the notes payable account reflect that the company has repaid some portion of funds owed. The entry reflects as a decrease of notes payable liability, since loan funds were repaid to the creditor. When funds are paid to a creditor, a debit appears in the notes payable account, which increases the company value on the balance sheet.
A t-account is an easy to read and understand method of how notes payable liabilities and other company balance sheet items work. An accountant draws a diagram of lines that look like a large letter T, and entries to the right side of the T are credits and the left side is debits. For notes payable liabilities, funds received as a loan appear on the right side of the t-account as a credit, and payments on the note payable appear on the left side as a debit. An accountant adds all credits for a total and all debits for a total. The difference between the two numbers is the balance of the notes payable account.