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What is a promissory note?

Posted by Dairel Denton Posted on June 12 2017

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A promissory note is a written and signed promise to pay a stated amount of money by a specified date or on demand.  The promissory note is to be paid by a specified person and it could involve a loan from a bank, a loan from a relative, or a replacement for an account payable.  It is sometimes referred to as a note payable.

 

The face amount of the promissory note is the written amount of money owed. The face amount will be recorded in the borrower's general ledger with a credit to their liability account Notes Payable. The lender will record the face amount with a debit to its asset account Notes Receivable.

 

A promissory note could specify an interest rate due on the borrowed amount.  If the promissory note specifies an interest rate, which has been agreed to by both parties then it’s used to accrue interest expense and interest payable on the books of the borrower. The lender will accrue interest income and interest receivable.  If the promissory note does not specify any interest then it should be assumed the face amount includes some interest.

The terms of the note include the face amount, the interest rate (if stated), the date, terms of repayment and the maturity date.  Sometimes the note will also include the lender’s rights in the event of default.

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