Is Notes Payable a Debit or Credit?
Notes payable is a credit. It is a liability for money the business has borrowed, so it increases with a credit when the loan is taken out and decreases with a debit as principal is repaid. Its normal balance is a credit, and it is reported on the balance sheet, split between current and long term.
- Account category
- Liability
- Normal balance
- Credit (Cr)
- Increases with
- Increase (Cr)
- Decreases with
- Decrease (Dr)
- Financial statement
- Balance sheet
Classifying one account is easy. Ledger IQ classifies the whole trial balance.
Try it freeNotes payable on a trial balance
| Acct # | Account | Debit | Credit |
|---|---|---|---|
| 1000 | Cash | 48,200.00 | |
| 1200 | Accounts receivable | 86,400.00 | |
| 1250 | Allowance for doubtful accounts | 4,200.00 | |
| 1300 | Inventory | 72,500.00 | |
| 1400 | Prepaid expenses | 9,800.00 | |
| 1450 | Notes receivable | 15,000.00 | |
| 1460 | Due from shareholder | 12,000.00 | |
| 1500 | Equipment | 120,000.00 | |
| 1510 | Accumulated depreciation | 38,000.00 | |
| 1700 | Goodwill | 40,000.00 | |
| 1710 | Accumulated amortization | 8,000.00 | |
| 2000 | Accounts payable | 31,500.00 | |
| 2050 | Credit card payable | 6,300.00 | |
| 2100 | Accrued expenses | 11,200.00 | |
| 2150 | Payroll liabilities | 7,400.00 | |
| 2200 | Sales tax payable | 4,100.00 | |
| 2300 | Unearned revenue | 18,000.00 | |
| 2400 | Notes payable (the account this page is about) | 85,000.00 | |
| 2450 | Due to shareholder | 20,000.00 | |
| 3000 | Common stock | 50,000.00 | |
| 3100 | Additional paid-in capital | 35,000.00 | |
| 3900 | Retained earnings | 92,000.00 | |
| 3950 | Shareholder distributions | 45,000.00 | |
| 4000 | Sales revenue | 550,000.00 | |
| 4100 | Sales returns and allowances | 12,000.00 | |
| 4200 | Interest income | 1,200.00 | |
| 5000 | Cost of goods sold | 240,000.00 | |
| 6000 | Salaries and wages | 96,000.00 | |
| 6050 | Officer compensation | 60,000.00 | |
| 6100 | Rent expense | 36,000.00 | |
| 6150 | Insurance expense | 14,400.00 | |
| 6300 | Depreciation expense | 19,000.00 | |
| 6450 | Interest expense | 6,800.00 | |
| 6900 | Other operating expenses | 28,800.00 | |
| Total | 961,900.00 | 961,900.00 |
Example journal entries
| Account | Debit | Credit |
|---|---|---|
| Cash | 100,000.00 | |
| Notes payable | 100,000.00 |
| Account | Debit | Credit |
|---|---|---|
| Notes payable | 15,000.00 | |
| Interest expense | 4,800.00 | |
| Cash | 19,800.00 |
Why it works that way
Borrowing creates an obligation to repay, and an obligation is a liability. Liabilities increase with credits, so loan proceeds credit notes payable. Repaying principal reduces the obligation, so it debits the account.
The important consequence is what is not happening: loan proceeds are not income and principal repayments are not expenses. Cash moved both times, but the income statement should see neither. The only part of a loan that touches the income statement is the interest.
Splitting each payment
A loan payment is one amount leaving the bank and two different things in the books. The amortization schedule from the lender is the authority: interest for the period is the rate applied to the outstanding balance, and the remainder reduces principal.
Clients who have no schedule usually post the whole payment one of two ways, and both are wrong in a way that is easy to spot. Everything to interest expense leaves the loan balance frozen at the original amount, year after year, while interest expense is far too high. Everything to principal makes the loan amortize too fast and understates the interest deduction.
The year end check is simple: the ending balance in notes payable should equal the payoff figure on the lender's December statement. When it does not, the difference is almost always misallocated payments.
Current versus long term, every year
Schedule L separates liabilities payable within one year from those payable in a year or more. For a term loan, that means computing the principal due in the next twelve months from the amortization schedule and presenting it separately.
The split changes annually as the loan amortizes, so copying last year's allocation is not enough. A loan nearing maturity can be entirely current.
Partnerships: the K-1 consequence
On a 1065 the debt does more than sit on Schedule L. Item K of each partner's K-1 reports their share of recourse, qualified nonrecourse and nonrecourse liabilities, and that allocation affects basis, which affects how much loss a partner can deduct.
Classifying a bank loan guaranteed personally by the partners as nonrecourse, or failing to report it at all, produces K-1s that misstate basis. That is not a presentation issue; it changes what each partner can claim on their own return.
Where it fits in the accounting equation
Tax return treatment
| Form | Line |
|---|---|
| Form 1120 | Schedule L line 17 for mortgages and notes payable in a year or more, line 16 for the current portion |
| Form 1120S | Schedule L line 17 for long term, line 16 for the current portion |
| Form 1065 | Schedule L line 16 for long term, line 15 for the current portion, and Schedule K-1 item K |
Common questions
Is notes payable a debit or credit?
A credit. It is a liability, so taking the loan credits the account and repaying principal debits it. A debit balance means more principal has been recorded as repaid than was ever borrowed, which usually points to payments posted entirely to principal.
Are loan proceeds taxable income?
No. Borrowing increases cash and debt by the same amount and never touches the income statement. The only deductible part of a loan is the interest. Recording proceeds as income is one of the few errors that overstates taxable income rather than understating it.
How do I split a loan payment between principal and interest?
Use the lender amortization schedule. Debit notes payable for the principal portion, debit interest expense for the interest portion, and credit cash for the total payment. Check the result against the lender year end balance.
Why does Schedule L need the loan split between current and long term?
Because the form reports liabilities payable within one year separately from those payable in a year or more. The current portion is the principal due over the next twelve months per the amortization schedule, and it changes every year.
Related answers
Go deeper
This page is the short answer. These articles work through the same ground in detail.
Last reviewed October 17, 2026.