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Understanding Notes Payable A liability is created when a company signs a note for the purpose of borrowing  money or extending its payment period credit. A note may be signed for an  overdue invoice when the company needs to extend its payment, when the  company borrows cash, or in exchange for an asset. An extension of the normal  credit period for paying amounts owed often requires that a company sign a note,  resulting in a transfer of the liability from accounts payable to notes payable.  Notes payable are classified as current liabilities when the amounts are due  within one year of the balance sheet date. When the debt is long-term (payable  after one year) but requires a payment within the twelve-month period following 
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Unformatted text preview: the balance sheet date, the amount of the payment is classified as a current liability in the balance sheet. The portion of the debt to be paid after one year is classified as a long-term liability. Notes payable almost always require interest payments. The interest owed for the period the debt has been outstanding that has not been paid must be accrued. Accruing interest creates an expense and a liability. A different liability account is used for interest payable so it can be separately identified. The entries for a six-month, $12,000 note, signed November 1 by The Quality Control Corp., with interest at 10% are:...
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