What is a Short Term Notes Payable?

//What is a Short Term Notes Payable?
What is a Short Term Notes Payable? 2017-10-10T06:48:36+00:00

Definition: A short-term notes payable is a current obligation made in writing to pay a specific amount within one year or the current accounting period. In other words, it’s written loan or promissory note between the lender and the borrower to pay the principle back plus interest on a specific date that is one year or less in the future.

What Does Short-Term Notes Payable Mean?

Similar to a check, short-term notes payable are negotiable and can be transferred between parties by endorsing them over. For example, assume that Bill lends Steve $1,000. Steve signs a promissory note stating that he must pay Bill the $1,000 principle plus 10 percent interest in six months.

After the first month, Bill decides he wants to consolidate some of his debts, so he endorses the promissory note from Steve to Todd to pay off his debt to Todd. Now Steve is obligated to pay the $1,000 plus interest to Todd.

Example

Short term notes payable usually come from business transactions dealing with short-term assets like inventory. Vendors typically give short-term loans to customers in order to purchase their annual inventory supplies.

For example, Ed’s Music is a musical retailer that purchases band and orchestral instruments to rent to high school students each year. Before the big rental season, Ed contacts his vendors and arranges a one-year loan for the new instruments. Ed purchases $100,000 of band instruments and signs a one-year note that includes 5 percent interest.

In this case, Ed would record the $100,000 loan by debiting cash and crediting short-term notes payable. Each month when he makes a payment, he would debit the notes payable and interest accounts and credit the cash account for the amount of the payment.

Companies also use short-term notes to extend the credit period of an existing note. For example, Ed might not be able to pay off his entire note in one year, so he takes out another short-term note to extend the terms.