What Is Notes Payable: Everything You Need to Know [with Examples]

If you are part of a finance or accounting team, you must have heard the term notes payable. You may be even aware of what they are. But do you know how notes payable differ from accounts payable and how to find them on a balance sheet?

Well, we’re here to remove any confusion or complications around notes payable. Once you know how they work, you can leverage notes payable to fund your short-term and long-term business needs, such as buying equipment, tools, vehicles, etc. 

To help you do that, we will cover everything about notes payable in this article and how you can automate your payables for greater efficiency. Let’s get to it.

What is Notes Payable?

Notes payable are formal written agreements where a borrower commits to repaying a lender a set amount, typically with interest, over a defined period. These obligations are usually classified as long-term liabilities but are recorded as current liabilities if due within the next 12 months. Unlike accounts payable, which are informal debts for goods or services received, notes payable involve specific terms such as interest rates and maturity dates.

Is Notes Payable An Asset Or Liability? (Explanation & Examples)

Notes payable is a liability account that represents money a company owes under a formal promissory note. It reflects a legal obligation to repay borrowed funds, typically with interest.

• If the note is due within one year, it is classified as a current liability.
• If the repayment period extends beyond one year, it is considered a long-term liability.

This classification is important for understanding a company’s financial obligations, liquidity, and overall risk profile. Notes payable appears on the balance sheet under liabilities, distinct from accounts payable, which typically involves informal trade credit. Unlike accounts payable, notes payable involve formal loan agreements and often include interest and structured repayment terms.

For finance teams using accounts payable automation software, proper classification of liabilities like notes payable ensures accurate reporting, audit readiness, and better cash flow forecasting.

How To Calculate Interest On Notes Payable (Formula + Example)

Understanding how interest is calculated on notes payable is essential for accurate financial planning and reporting. The standard formula for calculating interest on notes payable is:

where:

• Principal = The amount borrowed
• Rate = Annual interest rate (as a decimal)
• Time = Loan duration (in years or fraction of a year)

Example of Calculating Notes Payable
If a company borrows $10,000 at a 6% annual interest rate for one year:

Interest = $10,000 × 0.06 × 1 = $600

The terms of the promissory note specify the interest rate, payment schedule, and maturity date, ensuring both parties clearly understand the repayment expectations. Some companies also record accrued interest payable as a separate short-term liability, especially when interest is incurred but not yet paid.

Types Of Notes Payable

There are four main types of notes payable. To help you understand your options, we’ll share the benefits of each, along with the drawbacks of using them.

1. Single-payment notes payable

A single-payment note is a loan that requires the full repayment of both the principal (the original amount borrowed) and the interest in one lump sum at the end of the loan term. There are no payments made during the loan period—everything is due at maturity.

This type of note is often used for short-term borrowing when a business expects to have the funds available later but needs immediate access to capital now.  It’s simple to manage upfront but can put pressure on cash flow when the payment is due. If the business doesn’t have funds ready, it may need to refinance or risk defaulting.

2. Amortized notes payable

An amortized note involves making regular payments (monthly, quarterly, etc.) that cover both the interest and a portion of the principal. Over time, the loan balance is gradually reduced until it’s fully paid off.

This is one of the most common types of business loans, especially for long-term financing like equipment purchases or real estate. This structure helps businesses budget more easily, avoid large lump-sum payments, and track debt reduction over time. While it may cost more in interest overall, it’s a stable, predictable repayment method.

3. Negative amortization notes payable

A negative amortization note allows the borrower to make small payments that don’t fully cover the interest. The unpaid interest is added to the loan balance, causing the principal to increase over time instead of decrease.

This type of structure is uncommon in typical business loans and usually used in specialized financing or during difficult financial periods. It offers short-term relief by lowering payments, but increases debt over time. If not managed carefully, this can lead to ballooning liabilities and put long-term financial health at risk.

4. Interest-only notes payable

An interest-only note requires the borrower to pay only interest throughout the loan term. The full principal is paid all at once at the end. This structure is useful when a business expects increased cash flow in the future (e.g., from seasonal revenue, asset sales, or investment returns).

It keeps payments low in the short term and improves cash flow flexibility. However, the final lump-sum payment can be significant, and interest rates are often higher. It’s critical to have a plan for repaying the full principal at maturity.

Notes Payable Example 

Suppose a company wants to buy a vehicle & apply for a loan of $10,000 from a bank. The bank approves the loan & issues notes payable on its balance sheet; the company needs to show the loan as notes payable in its liability. Also, it must make a corresponding “vehicle” entry in the asset account.

When the company pays off the loan, the amount in its liability under “notes payable” will decrease. Simultaneously, the amount recorded for “vehicle” under the asset account will also decrease because of accounting for the asset’s depreciation over time.

How to Calculate Notes Payable?

Step 1: Identify the principal amount borrowed

• This is the initial amount borrowed from the lender, clearly mentioned in the note agreement.

Step 2: Calculate accrued interest

• Interest accumulates over time based on the terms agreed upon (interest rate and duration).
• Interest is calculated using the following formula:

• Time period can be calculated for days/365 or months/12
• Note: If calculating annually, just multiply by the number of years.

Step 3: Subtract any payments already made

• If partial or full payments have been made, subtract these amounts from the sum of principal and accrued interest.

The formula to calculate note payable is:

Example of Notes Payable Calculation (Detailed):

Suppose XYZ Company borrows $15,000 from ABC Bank on January 1st, at an annual interest rate of 8%. The loan must be paid back in 6 months (by June 30). During these 6 months, XYZ Company makes a partial repayment of $4,000.

Calculate step-by-step:

Step 1: Principal borrowed

• Clearly stated in the agreement:

Step 2: Calculate interest Accrued

• Interest rate = 8% annually
• Time period = 6 months (or 0.5 years)
• Calculation of interest:

Breaking it down further:

• 8% annually means for one year it would be: $15,000 × 8% = $1,200
• Since the note is for half a year (6 months), divide by 2:

Thus, total interest accrued for the period = $600

Step 3: Subtract payments made

• Payment already made = $4,000

Step 4: Final calculation

Now, calculate your Notes Payable:

Substituting the numbers into the equation:

• Principal = $15,000
• Interest accrued = $600
• Payment made = $4,000

Therefore:

Interpretation of Example Result

After borrowing $15,000 and accruing interest of $600 over 6 months, and having already repaid $4,000, XYZ Company still owes $11,600 as Notes Payable.

How to Find Notes Payable on a Balance Sheet

Notes payable appear in the liabilities section of a company’s balance sheet and can be listed under either current or long-term liabilities. If the note is due within one year, it is considered a current liability; if it’s due after one year, it falls under long-term liabilities. These entries represent formal loans or obligations that a business has agreed to repay, usually with interest. Understanding where to find notes payable helps you evaluate a company’s financial commitments and manage cash flow planning more effectively

Continuing with the above example, let’s assume the loan company applied to buy that vehicle is from Bank of America. The promissory note is payable two years from the initial issue of the note, which is dated January 1, 2025, so the note would be due December 31, 2027. In addition, there is a 5% interest rate, payable quarterly.

For the first journal entry, you would debit your cash account with the loan amount of $10,000 since your cash increases once the loan has been received. You will also credit notes payable to record the loan.

The interest on notes payable needs to be recorded separately. In our example, a 5% interest rate is paid quarterly to the bank.

The interest will be recorded in the interest payable account and will reflect in the current liabilities section as the interest is paid quarterly, which is considered short-term. The journal entry of the interest for the first year will look like this:

Interest expense will need to be entered and paid each quarter for the life of the note, which is two years.

In the end, you need to pay the principal amount of the promissory note; in this case, you will pay off the principal in December of 2027, which is indicated on the promissory note. The journal entry for it would look like this:

Notes Payable Vs Accounts Payable: What’s the Difference

Notes payable and accounts payable play an essential role in a business’s financial management. NP involve written agreements with specific terms and are typically long-term liabilities. In contrast, APs are short-term debt obligations with less formal agreements and shorter payment terms.

To understand the differences between notes payable and accounts payable, let’s delve deeper into this.

Notes Payable Vs Short-term Debt: What’s the Difference

Both notes payable and short-term debt are financial obligations a business records on its balance sheet, but they differ in structure, purpose, and timing. While they may overlap in some cases, understanding their distinctions can help finance teams manage liabilities more effectively and plan for future cash flow needs.

Notes payable generally refer to formal written agreements in which a company promises to repay a specific amount, often with interest, by a set date. These agreements may be short- or long-term depending on the maturity period outlined in the note.

Short-term debt, on the other hand, refers more broadly to any borrowing that must be repaid within one year. This can include short-term loans, credit lines, and in some cases, short-term notes payable. It’s often used for operational liquidity or bridging temporary funding gaps.

Let’s break down the differences between the two:

Understanding the nuances between notes payable and short-term debt allows businesses to more accurately assess financial obligations, plan for cash flow, and communicate clearly with investors or auditors. Finance leaders often use automation tools or ERP systems to track maturity dates, manage interest payments, and forecast the impact of these liabilities on their balance sheet.

How Highradius Helps You Manage Notes Payable With Greater Accuracy And Control

If you’re trying to better understand and manage notes payable, it’s likely you’re also dealing with the challenges of manual AP processes, inconsistent liability tracking, or limited visibility into payment schedules and obligations. That’s where HighRadius comes in.

HighRadius offers an AI-powered AP automation solution that helps you take full control of your accounts payable processes—including tracking formal obligations like notes payable. Here’s how we help:

1. Accurately classify payables: Automatically identify and categorize payables as current or long-term based on due dates, helping you maintain a clean, compliant balance sheet.

2. Centralize payment obligations: Whether it’s vendor invoices or promissory notes, manage all your outgoing payments in a single, unified dashboard with clear maturity timelines.

3. Improve reporting and audit readiness: Get real-time visibility into your liabilities, payment status, and interest schedules—ideal for monthly close, audits, and cash flow planning.

4. Eliminate manual errors: With 99.5% data capture accuracy, HighRadius ensures that every detail—payment terms, interest rates, due dates—is recorded correctly, reducing the risk of missed or misclassified obligations.

5. Enable proactive decision-making: Built-in analytics provide insight into payment trends, liquidity positions, and working capital, empowering finance leaders to plan smarter.

By automating your AP process, HighRadius helps finance teams move beyond spreadsheets and guesswork—so you can manage your payables with clarity, confidence, and control.

Ready to simplify how you manage notes payable and improve your AP performance? Discover how HighRadius can transform your accounts payable operations.

FAQs on Notes Payable

1. What is the formula to calculate notes payable?

The formula to calculate the present value of a note payable is:

PV stands for present value, FV is the future value (including both principal and interest), “i” is the interest rate, and “n” is the number of periods. This formula is useful when you’re trying to understand what a future payment is worth in today’s terms. It’s especially relevant for long-term notes payable and financial forecasting. Businesses use this to evaluate loan terms or compare different financing options.

2. Is notes payable a liability or an asset?

Notes payable is a liability on the balance sheet because it represents money the business owes. If the payment is due within 12 months, it’s classified as a current liability. If it’s due in more than a year, it’s listed under long-term liabilities.

Proper classification of notes payable helps assess a company’s short- and long-term financial obligations. This distinction is important for liquidity analysis and audit readiness.

3. Is notes payable a debit or credit?

In accounting, notes payable is recorded as a credit because it increases liabilities. When a company borrows money through a note, it debuts cash and credits notes payable. This entry shows an increase in available funds and a new obligation to repay. It’s important to record this correctly to ensure your balance sheet reflects true liabilities. Mistakes in this entry can impact financial reporting and compliance.

4. What is a note payable in accounting?

A note payable is a formal written agreement where a business agrees to repay a borrowed amount with interest over time. It includes terms like repayment schedule, interest rate, and due date. In accounting, it is recorded as a liability, either short-term or long-term, depending on when it’s due. 

5. What is the difference between notes payable and notes receivable?

Notes payable and notes receivable are opposites in accounting. Notes payable are amounts a business owes to others—recorded as a liability. Notes receivable are amounts others owe the business—recorded as an asset. Both are formal agreements, often with interest, due dates, and legal terms.

6. How do you record notes payable?

To record notes payable, you credit the Notes Payable account and debit the account receiving the funds (like Cash or Equipment). It appears on the balance sheet under current or long-term liabilities, based on the due date. Interest associated with the note is recorded separately as an interest expense.

7. What is the difference between notes payable and interest payable?

Notes payable refers to the full amount of a formal loan or borrowing obligation. Interest payable, on the other hand, is the amount of unpaid interest accrued on that loan. Both are liabilities, but interest payable is usually short-term and related to the cost of borrowing.