Everything about Promissory Note totally explained
A
promissory note, also referred to as a
note payable in
accounting, is a
contract detailing the terms of a promise by one party (the
maker) to pay a sum of
money to the other (the
payee). The obligation may arise from the repayment of a
loan or from another form of
debt. For example, in the sale of a business, the purchase price might be a combination of an immediate cash payment and one or more promissory notes for the balance.
The terms of a note typically include the amount, the
interest rate if any, and the
maturity date. Sometimes there will be provisions concerning the payee's rights in the event of a
default, which may include foreclosure of the maker's interest.
Demand promissory notes are notes that don't carry a specific maturity date, but are due on demand of the lender. Usually the lender will only give the borrower a few days notice before the payment is due.
For loans between individuals, writing and signing a promissory note is often considered a good idea for tax and recordkeeping reasons.
A promissory note differs from an
IOU in that the latter is a simple acknowledgement of the existence of a debt owed, whereas a promissory note, as its name implies, contains an affirmative undertaking to pay the amount stated.
In the
United States, a promissory note that meets certain conditions is a
negotiable instrument governed by Article 3 of the
Uniform Commercial Code. Negotiable promissory notes are used extensively in combination with
mortgages in the financing of
real estate transactions. Other uses of promissory notes include the capitalization of corporate finances through the issuance and transfer of
commercial paper.
At various times in history, promissory notes have acted as a form of privately issued
currency. In many jurisdictions today, bearer negotiable promissory notes are illegal precisely because they can act as an
alternative currency. All
Scottish banknotes are effectively standardized demand promissory notes.
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