Question

Accounting for debt is important in businesses. Understanding the accounting for current and long-term liabilities is important in understanding the solvency of a business. In this Discussion, you will look at how businesses finance operations through debt.

Rayborn Company obtains $20,000 in cash by signing a 9%, 6-month, $20,000 note payable to First Bank on July 1. Rayborn's fiscal year ends on September 30. What information should be reported for the note payable in the annual financial statements? What disclosure is required? Why is this important?

Answer 1

In accounting, Notes Payable is a general ledger liability account in which a company records the face amounts of the promissory notes that it has issued. The balance in Notes Payable represents the amounts that remain to be paid. Since a note payable will require the issuer/borrower to pay interest, the issuing company will have interest expense. Under the accrual method of accounting, the company will also have another liability account entitled Interest Payable. In this account the company records the interest that it has incurred but has not paid as of the end of the accounting period. For all the companies the amounts in Notes Payable and Interest Payable are reported on the balance sheet as follows: 1. the amount due within one year of the balance sheet date will be a current liability, and 2. the amount not due within one year of the balance sheet date will be a noncurrent or long-term liability. The company should also disclose pertinent information for the amounts owed on the notes. This will include the interest rates, maturity dates, collateral pledged, limitations imposed by the creditor, etc.