A business's notes payable are loans and written promises to pay an agreed-upon amount in the future. They're classified as either current, meaning they'll be paid off within the next 12 months, or noncurrent, which means they will be paid off in more than 12 months. These notes are part of the liabilities of the company, and, therefore, they appear on the balance sheet, not on the income statement.
Four Financial Statements
Companies use four financial statements for reporting. An income statement shows income and expenses over a given period. The balance sheet lists a company's assets, liabilities and equity and is a snapshot of financial health at a specific moment in time. The statement of owner's equity breaks down the types of equity and withdrawals. It's a more detailed view of the equity portion of the balance sheet. The statement of cash flows shows how much cash the company has coming in and going out, and helps executives determine proper timing for making payments.
The Income Statement
The income statement documents how much money a company has made over the course of a given time frame, such as a quarter or a year. It presents the company's revenue, often broken down into various revenue streams such as product sales and royalties earnings. It then lists the various expenses, such as labor and raw materials. Finally, it presents the company's net revenue, which is what the company has earned after expenses are deducted from revenues.
The Balance Sheet
A company's balance sheet presents a current snapshot of its assets, liabilities and equity. This includes both current assets, which are items such as cash, accounts receivable and inventory that can quickly be liquidated and spent, and fixed assets such as land and buildings that are difficult to liquidate. Current liabilities are due within the next 12 months, such as accounts payable, wages payable and, of course, notes payable. Noncurrent liabilities are long-term debts such as mortgages. The difference between assets and liabilities is what the company has left: equity, which belongs to owners or shareholders.
Importance of Notes Payable
Almost all of a company's liabilities are debts that must be paid before owners or shareholders can get their equity from the company. Notes payable in particular are debts in the form of short-term loans or promissory notes, often with a specific time frame such as 90 days in which they must be paid. They may require monthly payments or be due as a lump-sum payment at the end of the term. These notes may be backed by collateral and the lender may prevent the company from paying dividends to shareholders before paying the notes. If the company goes bankrupt, notes payable are paid before shareholders. Interest is charged on notes, but accounting rules state that the interest is recorded in accruals, a separate part of the financial statements.
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