Which of the following statements is correct regarding the Notes Payable account?

• A. Notes Payable represents a written promise to pay a specified amount of money at a future date.
• B. Notes Payable is classified as an equity account on the balance sheet.
• C. Interest expense on notes payable is recorded as a reduction to the Notes Payable account.
• D. Notes Payable is only used for non-interest-bearing obligations.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of Notes Payable. Notes Payable is a liability account that represents a written promise to pay a specified amount of money at a future date, often including interest. It is typically used for loans or other formal borrowing arrangements.
2. Step 2: Analyze the classification of Notes Payable on the balance sheet. Notes Payable is classified as a liability, not equity. It can be categorized as either a current liability (if due within one year) or a long-term liability (if due after one year).
3. Step 3: Examine how interest expense is recorded. Interest expense related to Notes Payable is recorded separately in the Interest Expense account, not as a reduction to the Notes Payable account. The Notes Payable account reflects the principal amount owed.
4. Step 4: Evaluate the use of Notes Payable for non-interest-bearing obligations. Notes Payable can be used for both interest-bearing and non-interest-bearing obligations, depending on the terms of the agreement.
5. Step 5: Identify the correct statement. Based on the analysis, the correct statement is: 'Notes Payable represents a written promise to pay a specified amount of money at a future date.' This aligns with the definition and purpose of the Notes Payable account.