PROMISSORY NOTES
26. A promissory note is a form of commercial paper much used in business. Goods are sold on specific terms—that is, to be paid for in a certain time after date. Profits are based on the supposition that the bills will be paid when due. When not so paid, the debtor is virtually borrowing money from the creditor, and should pay interest for the use of that money just as he would if he had borrowed it from a bank. To settle the account when it is not convenient to pay cash, it is customary to give a promissory note for the amount, plus interest, payable on a certain date. The promissory note is more convenient for the creditor; for when it bears his endorsement, his bankers will discount it, thus giving him the money for use in his business. Even though he may not discount it, the promissory note is better for the creditor, as it gives him a definite promise to pay, which he does not have when the debt is represented by an open account.
27. Bills Receivable and Bills Payable. The commercial term for promissory notes accepted by us is Bills Receivable. The commercial term for promissory notes given by us is Bills Payable. The term "bill" is used in this connection for the reason that a promissory note is a negotiable instrument, and when indorsed it becomes practically a bill of exchange. The accounts in the ledger which represent notes receivable and notes payable are called Bills Receivable Account and Bills Payable Account.
The bills receivable account is debited when a note is received, and credited when a note is paid. The balance of bills receivable account shows the amount of unpaid notes payable to us.
The bills payable account is credited when we give a note and debited when we pay a note. The balance of bills payable account shows the amount of the notes that we owe.
28. Bill Book. For the purpose of keeping a record of bills receivable and bills payable, a book known as a bill book is used. Any draft, note, due bill, or other written promise to pay a specified sum at a stated time, should be treated as a note or bill—receivable or payable, as the case may be. The bill book is an auxiliary book, and the record kept is usually treated as a memorandum only, records of each transaction being made in the journal. The form shown (p. 45) is one in common use.
