Promissory

Definition

A promissory note is a financial instrument that contains a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date. It is often used in business transactions as a way to obtain short-term financing.

5 Must Know Facts For Your Next Test

1. Promissory notes are considered short-term liabilities if they are due within one year.
2. The interest rate and payment terms are typically specified in the promissory note.
3. When recording a promissory note, the initial entry usually involves debiting cash and crediting notes payable.
4. Accrued interest on promissory notes must be recorded periodically, especially at the end of accounting periods.
5. Upon repayment of the promissory note, the journal entry generally involves debiting notes payable and interest expense, and crediting cash.

Related terms

Notes Payable:

Amounts owed by a company that are evidenced by written promises to repay.

Interest Expense:

The cost incurred by an entity for borrowed funds.

Current Liabilities:

Obligations that are expected to be settled within one year.