Promissory notes issued by a business are tracked on which account?

• A. Notes payable
• B. Notes receivable
• C. Cash
• D. Inventory

Answer: (B)

A promissory note is an instrument that creates a claim to future payment, and how it’s recorded depends on who holds the note. If you hold a promissory note issued by a business, that note is an asset for you because you are owed money; you would record it as notes receivable. In contrast, the business that issued the note would record a liability as notes payable on its own books. Cash and inventory aren’t the instruments themselves, but are affected only when payment is actually received or the inventory is involved in a transaction. So, when considering promissory notes from the perspective of the person who holds the note, it is notes receivable.