In accounting, the recording of any single business transaction involves at least two accounts representing both debit and credit. In other words, the double-entry recording requires that the full transaction value be recorded on the debit side of one or more accounts and also on the credit side of one or more accounts. The total amount of debit should always match, or offset, the total amount of credit. Notes payable as a liability account often is offset by an increase or decrease in an asset account, depending on the change in notes payable.
Notes payable is a type of borrowing in the form of a promissory note that the borrower promises to payback the principal plus interest at a future due date. Thus, notes payable is a liability account listed on a balance sheet, also defined as a credit account. An increase in the amount of notes payable from a new issuance is recorded as an credit entry to the account and a decrease in the amount of notes payable from repayments of a due balance is recorded as a debit entry to the account.
Since the issuance of notes payable requires recording a credit entry to the notes payable account, the offset entry to the notes payable as issued will be a debit entry most likely to an asset account. If the issuance of notes payable is directly used to provide a capital source for an asset, the offset entry to the notes payable will be a debit entry to increase either the cash account or the account of the asset straightly financed by the notes payable. However, if the issuance of notes payable is to pay down the balance of another liability, the offset entry to the notes payable account will be a debit entry to remove that liability account.
Since the repaying of notes payable requires recording a debit entry to the notes payable account, the offset entry to the notes payable being repaid will be a credit entry to an asset account or an equity account. When cash is used to pay down the notes payable, the offset entry to the notes payable will be a credit entry to decrease the cash account. When the due notes payable is restructured and converted to equity, the offset entry to the notes payable will be a credit entry to increase either the preferred or common stock account.
A transaction of notes payable also involves making different entries on related interest accounts. Interest on notes payable accrues at the end of an accounting period during the term of the notes payable. To record the accrued interest, interest expense is debited and interest payable is credited. At the due date of the notes payable, newly accrued interest is debited as interest expense and cash is credited to pay for the interest expense. Additional cash is also credited to pay for any outstanding interest payable from previous accrual and the outstanding interest payable is debited and removed.
An investment and research professional, Jay Way started writing financial articles for Web content providers in 2007. He has written for goldprice.org, shareguides.co.uk and upskilled.com.au. Way holds a Master of Business Administration in finance from Central Michigan University and a Master of Accountancy from Golden Gate University in San Francisco.