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Notes payable

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Notes payable are long-term liabilities that indicate the money a company owes its financiers—banks and other financial institutions as well as other sources of funds such as friends and family. They are long-term because they are payable beyond 12 months, though usually within five years.

Companies may borrow these funds to buy assets such as vehicles, equipment and tools that are likely to be used, amortized and replaced within five years.

Some notes payable are secured, which means the creditor has a claim on the borrower’s assets if payment terms are not met. If secured, the timeline for repayment could be longer.

Notes payable appear under liabilities on the balance sheet, separated into “bank debt” and “other long-term notes payable”. Payment details can be found in the notes to the financial statements.

More about notes payable

The balance sheet below shows that ABC Co. owed $70,000 in bank debt and $60,000 in other long-term notes payable as of March 31, 2012. The company has $1.40 in long-term assets ($180,000) for every $1 in long-term debt ($130,000); this is considered a healthy balance.

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