promissory note

(noun)

a document saying that someone owes a specific amount of money to someone else, often with the deadline and interest fees

Related Terms

  • maker
  • payee
  • promissory
  • debtor

Examples of promissory note in the following topics:

  • Notes Payable

    • A promissory note is a negotiable instrument, where one party (the maker or issuer) makes, under specific terms, an unconditional promise in writing to pay a determined sum of money to the other (the payee), either at a fixed or determinable future time or on demand by the payee.
    • Demand promissory notes are notes that do not carry a specific maturity date, but are due on demand by the lender.
    • For loans between individuals, writing and signing a promissory note are often instrumental for tax and record keeping purposes .
    • Negotiable promissory notes are used extensively in combination with mortgages in the financing of real estate transactions.
    • A promissory note due in less than a year is reported under current liabilities.
  • Components of a Note

    • Notes Receivable represents claims for which formal instruments of credit are issued as evidence of debt, such as a promissory note.
    • Notes Receivable represents claims for which formal instruments of credit are issued as evidence of debt, such as a promissory note.
    • Maker-the maker of a note is the party who receives the credit and promises to pay the note's holder.
    • The maker classifies the note as a note payable.
    • The payee classifies the note as a note receivable.
  • Types of Receivables

    • Receivables can generally be classified as accounts receivables or notes receivable, though there are other types of receivables as well.
    • Notes receivable are amounts owed to the company by customers or others who have signed formal promissory notes in acknowledgment of their debts.
    • Promissory notes strengthen a company's legal claim against those who fail to pay as promised.
    • The maturity date of a note determines whether it is placed with current assets or long-term assets on the balance sheet.
    • Notes that are due in one year or less are considered current assets, while notes that are due in more than one year are considered long-term assets.
  • Valuing Notes Receivable

    • Notes Receivable represents claims for which formal instruments of credit are issued as evidence of debt, such as a promissory note.
    • Notes receivable are considered current assets if they are to be paid within 1 year and non-current if they are expected to be paid after one year.
    • Differentiate between the allowance method and the write off method for valuing notes receivable
  • Financial Statement Notes

    • Notes to financial statements are added to the end of financial statements.
    • These notes help explain specific items in the financial statements.
    • The notes clarify individual line items on the various statements.
    • Notes can also explain the accounting methods used to prepare the statements.
    • The notes support valuations for how particular accounts have been computed.
  • What Goes on the Balances Sheet and What Goes in the Notes

    • The balance sheet lists current liability accounts and their balances; the notes provide explanations for the balances, which are sometimes required.
    • Current liability information found in the notes to the financial statements provide additional explanation on the liability balances and any circumstances affecting them.
    • Explain why a company would use a note to the balance sheet
  • Recognizing Notes Receivable

    • In accounting, notes receivables are accounts to keep track of accrued assets that have been earned but not yet received.
    • In accounting, notes receivables are accounts to keep track of accrued assets that have been earned but not yet received.
    • Describe the difference between using the allowance method vs. the write off method when recording a note receivable
  • Gain Contingencies

    • If the gain is probable and quantifiable, the gain is not accrued for financial reporting purposes, but it can be disclosed in the notes to financial statements.
    • If the gain is not probable or its amount cannot be reasonably estimated, but its effect could materially affect financial statements, a note disclosing the nature of the gain is also disclosed in the notes.
    • Thus, if a gain contingency, that remains unrealized, affects the economic decision of statement users, it should be disclosed in the notes.
    • A material gain contingency that is both probable and reasonably estimated can be disclosed in the notes to financial statements.
  • Current Maturities of Long-Term Debt

    • Long-term liabilities are liabilities with a due date that extends over one year, such as a notes payable that matures in 2 years.
    • Examples of long-term liabilities are debentures, bonds, mortgage loans and other bank loans (it should be noted that not all bank loans are long term since not all are paid over a period greater than one year. ) Also long-term liabilities are a way for a company to show the existence of debt that can be paid in a time period longer than one year, a sign that the company is able to obtain long-term financing .
    • For example, a loan for which two payments of USD 1,000 are due--one in the next 12 months and the other after that date--would be split into one USD 1000 portion of the debt classified as a current liability, and the other USD 1000 as a long-term liability (note this example does not take into account any interest or discounting effects, which may be required depending on the accounting rules that may apply).
  • Reporting Long-Term Liabilities

    • "Notes Payable" and "Bonds Payable" are also examples of long-term liabilities, and they often introduce an interesting distinction between current liabilities and long-term liabilities presented on a classified balance sheet.
    • Let's say Company X obtains a 100,000 Note Payable that requires 5 annual payments of 20,000 starting 1/1/14.
    • Despite a Note Payable, Bonds Payable, etc., starting out as a long-term liability, the portion of that debt that is due within a year has to be backed out of the long-term liability and reported as a current liability.
    • See below for the balance sheet reporting treatment of the current and long-term liability portions of the Note Payable from initiation to final payment.
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