Definition: A note, often called a promissory note, is a written promise to pay a specific amount of money at a future date. In other words, a note is a loan contract between the maker and the payee. Some notes are also payable on demand of the maker.
What Does Note Mean?
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The maker of a note is the entity that creates and initiates the note to borrow money from the payee. The payee of a note is the entity that loans the money to the maker and must be repaid.
Some people have a hard time remembering the difference between the maker and payee. Just remember that the maker makes the note and borrows the money. The payee lends the money and gets paid back in the future. Makers borrow and payees get paid back. Make sense?
Notes can be used for a ton of different business transactions. Some companies use notes to help finance expansions and others use then to purchase their annual inventory quantities. It’s basically just a loan, so it could be used to finance anything.
Maybe we should look at an example.
Example
Tim’s Roofing Co. wants to purchase a crane, but doesn’t have enough cash. Tim borrows the money from Contractor Bill’s Financing Services and creates a 90-day note payable in 90-days or on demand of payee. Tim is considered the maker of the note and Bill is the payee. Tim borrowed the funds and must pay it back to Bill in either 90 days or when ever Bill demands payment.
On demand is an option that can be put in any note contract where the maker must pay the payee whenever the payee demands payment. There can also be special stipulations on when demands can be made. For instance, a demand can be restricted to the last 30 days of the contract.
Any note longer than one year is classified as a long-term liability on the balance sheet. Notes with less than one year outstanding are considered current liabilities.
