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.
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