Are Notes Payable a Liability?

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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.

Balance Sheet

  • 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.

T-Accounts

  • 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.

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