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Long-Term Notes Payable

Moneyzine Editor
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Moneyzine Editor
2 mins
January 24th, 2024
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Long-Term Notes Payable

Definition

The term long-term notes payable refers to an agreement a company enters into with another party, which includes a formal written promise to pay pre-determined amounts on specific dates. To be categorized as a long-term note payable, the maturity of the note must be longer than one year or operating cycle. Both long-term and current notes payable appear in the liabilities section of a company's balance sheet.

Explanation

Long-term notes are similar to bonds, since they both carry a stated or implied rate of interest and have a known maturity date. Unlike a bond, notes payable are not issued to the public and traded. They are typically bilateral agreements between the issuing company and a trade partner or financial institution. For example, a three year loan obtained from a bank would be classified as a long-term note payable.

These written promises to pay would state both the dates payments are due as well as the rate of interest charged on any outstanding balance. Generally, these notes fall into three categories:

  • Cash: includes notes issued solely for cash. For example, a company might issue notes that are sold for $1,000 with a stated interest rate of 4.5%.

  • Cash and Future Rights: while the company would still receive cash from the holder of the note, this agreement would also provide the holder with a future benefit such as a discount on a product made by the borrower.

  • Non-Cash: includes notes that involve plant, property or equipment. For example, a company might receive three acres of land in exchange for providing the seller with a note payable valued at $100,000.

As is the case with bonds, the value of notes payable appearing on the company's balance sheet would be equal to the present value of the future cash flows associated with the agreement.

Related Terms

  • Liabilities
    The financial accounting term liability is used to describe the debt of a corporation that results from a transaction involving the transfer of an asset or the provision of a service. Liabilities are reported on a company's balance sheet.
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  • Interest Expense
    The financial accounting term interest expense is used to describe the interest payments that have come due on amounts borrowed by a company or an individual. Interest expense will appear as a line item on a company's income statement.
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  • Mortgage Notes
    The term mortgage note refers to a promissory note that is secured by a mortgage, which pledges the title to a property in the event of default. Also known as a real estate lien note, a mortgage note provides the holder of the security with a written promise to make interest and principal payments on specific dates.
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