Note Payable Definition

A note payable is a loan that is typically repaid in installments over a period of time. The terms of the loan are specified in a promissory note, which is a legal document that outlines the borrowed amount, interest rate, maturity date, and repayment schedule.

Most notes payable are secured by collateral, which gives the lender a claim on the property if the borrower defaults on the loan. Common types of collateral include real estate, vehicles, and equipment. If the collateral is sold or repossessed, the proceeds are used to repay the outstanding balance on the loan.

Interest accrues on a note payable from the date of issuance until it is paid in full. The interest expense is recorded on the income statement and paid out of operating cash flow. Depending on the terms of the loan, payments may be interest-only or may include principal and interest.

Notes payable are classified as long-term liabilities if they have a maturity date that is greater than one year from the balance sheet date. Short-term notes payable are due within one year or less and are classified as current liabilities.