A bank note payable is a borrower’s liability under a promissory note payable to a bank. The note is a written agreement with the lender that fixes a principal amount, a stated interest rate and a maturity date, and that signed promise is what separates it from a payable arising out of a supplier’s invoice.
What the Note Fixes
In UCC Article 3 an instrument means a negotiable instrument (UCC 3-104(b)), and such an instrument is a note if it is a promise (UCC 3-104(e)), a promise being a written undertaking to pay money signed by the person undertaking to pay (UCC 3-103(a)(12)). What that signature does to a balance, set against one keyed from an invoice, is in accounts payable and notes payable.
The maturity a note states is not free-form. A promise is payable at a definite time if it is payable at a fixed date or dates, or at a time readily ascertainable when it is issued, subject to rights of prepayment, acceleration or extension (UCC 3-108(b)), and payable on demand if it says so or states no time of payment at all (UCC 3-108(a)). It can be both, since an instrument payable at a fixed date that is also payable upon demand made before that date is payable on demand until the fixed date (UCC 3-108(c)). That matters at close, because a demand feature settles classification on its own whatever the repayment schedule says, which current liabilities works through.
How the Balance Enters and Leaves the Ledger
The balance enters at the amount drawn, with nothing recorded for interest because none has run yet. Each scheduled payment then splits, the principal portion reducing the note and the interest portion covering the interest that has run since the last payment. The balance leaves the ledger when the last principal payment clears it. A bank note written at a market rate normally carries no discount or premium, so there is usually no discount or premium to amortize.
The Interest Is Its Own Liability
Interest runs on the principal between payment dates and does not sit inside the note balance. At each close the borrower records what has run since the last payment date as interest expense and a separate interest payable, the accrued interest Regulation S-X names among the items stated separately in the balance sheet or in a note once one exceeds 5 percent of total current liabilities (17 CFR 210.5-02). The day count deciding how much has run is in accrued interest.
One Note, Two Balance Sheet Lines
One note is usually reported on two lines. The principal falling due within the next year is normally current and the remainder is not, so the boundary is redrawn at every close rather than fixed when the note is signed. The test behind that split is in current liabilities, and the remainder side is in long-term liabilities.
Say a client is carrying one bank note at year end.
Principal outstanding at the balance sheet date 300,000
Stated annual rate 8%
Principal scheduled for the next 12 months 60,000
Current liabilities, current portion of the note 60,000
Long-term liabilities, remainder 240,000
Total note reported 300,000
Fiscal year end December 31
Interest last paid September 30
Three months at the stated rate
300,000 x 8% x 3/12 = 6,000
Accrued interest payable, a separate line 6,000Nothing is paid down by that presentation, and the accrued interest belongs to neither note line.
A filed balance sheet separates the borrowing by the class of creditor as well as by maturity, because amounts payable to banks for borrowings are stated separately from amounts payable to trade creditors, and that bank amount may be given in the balance sheet or in a note (17 CFR 210.5-02). A bank note is therefore reported by the kind of creditor holding it and not only by when it comes due. The corporate return asks only for the maturity split, with mortgages, notes, bonds payable in less than 1 year on Schedule L line 17 and the same items payable in 1 year or more on line 20 (IRS, Form 1120, Schedule L).
What a Bank Note Payable Is Not
It is not accounts payable. A note exists as a signed promise where a trade payable has none, it runs to a lender where payables run to many suppliers, and it states an interest rate where an ordinary invoice states none, a separation set out in accounts payable and notes payable.
It is not bonds payable. A bank note is normally one agreement with one lender, while a bond issue is normally one borrowing divided into securities held by many investors under an indenture. The discount, premium and effective interest rules reach both; the form of the borrowing is where they part.
Whether the bank can reach the borrower’s other assets once the collateral is exhausted is a separate label on the same note, covered in recourse.
Common Questions
It means the business owes a bank under a signed note rather than on an invoice. The balance is a bank borrowing and not a trade balance, and a filed balance sheet states the two separately (17 CFR 210.5-02).
The bank case is a term loan drawn under a signed note, with a fixed principal, a stated rate and a scheduled repayment. Notes also arise outside a bank, and that wider set is listed in accounts payable and notes payable.
They are one note read from opposite sides. The borrower carries notes payable, a liability, and the lender carries notes receivable, an asset, for the same principal.
Drawing on a bank note debits cash and credits notes payable. Interest at close debits interest expense and credits interest payable, keeping the two balances apart. A scheduled payment debits notes payable for the principal portion, debits interest payable for interest already accrued and interest expense for whatever has run since, and credits cash for the total. Which side increases which kind of account is in debit vs credit.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own debt schedules and interest accruals through a trial task before anything client facing depends on it.
