In financial records, notes payable represents the principal owed in a loan taken by the company, and has a credit normal balance.
Scenarios
- When borrowing money, we debit the cash account and credit notes payable.
- When paying back principal, we debit notes payable and credit cash.
- e.g., “Made a principal payment on outstanding note payable”
- Note that for short-term loans, use accounts payable instead. In general, when no “principal” or “interest” is involved, use accounts payable instead of notes payable.
- e.g., “Paid to creditors on account”
- When paying back interest, we debit expenses and credit cash.