Loading the player...

What is an 'IOU'

An IOU is an informal document that acknowledges a debt owed, and this debt does not necessarily involve a monetary value as it can also involve physical products. The informal nature of an IOU means there may be some uncertainty about whether it is a binding contract, and the legal remedies available to the lender may be different from those involving formal contracts such as a promissory note or bond indenture. Because of this uncertainty, an IOU is generally not a negotiable instrument during litigation or negotiations.

BREAKING DOWN 'IOU'

Due to the informality of IOUs, those issuing the IOU are given free reign when writing and issuing it. Criteria, such as time, date, interest and payment type, are not mandatory but may be implied. The term "IOU" is an abbreviation, in phonetic terms, of "I owe you."

Example

Smithco Bricks places an order for raw materials. However, the company does not have enough cash to pay for the entire order. Instead, it pays for a partial order and issues an IOU in good faith to pay for the rest of the raw materials at a later date. The IOU could say Smithco Bricks pays the outstanding balance 30 days after the first payment with or without interest.

Legal Stuff

An IOU may simply serve as a way to put a transaction in writing for later consideration. The document also comes in handy for loans made to a person or business that wants to illustrate an amortization table over a period of time. With an IOU form for a loan, a repayment schedule is a must. The amount of the loan, any interest payments, payoff amounts and the frequency of installments are all considerations a party may include in an IOU form. However, an IOU may deal with credit accounts in the receivables department.

Outstanding Receivables

A company's IOU is counted as an asset on the balance sheet because another party owes that company money or goods. This usually happens when a business provides products or services to be paid later, such as after 30 or 90 days for short-term agreements. An IOU for outstanding receivables is a current asset if the term is one year or shorter. For IOUs longer than a year, accountants consider this a long-term asset. One innovative company sought to take advantage of cash-strapped companies with outstanding IOUs in 2008 in the middle of the financial crisis.

IOU Service

The Receivables Exchange offers an online marketplace for companies to receive cash for their IOUs at a slight discount. The company makes money by cashing in the full amount of the IOU. As an example, Acme Trash company has an outstanding IOU to Riverbend Plastics for $500 for the next 30 days. The Receivables Exchange might buy the IOU for $450 and give the cash to Acme Trash. The Receivables Exchange then gets the full $500 from Riverbend Plastics after a month, giving the firm a $50 profit on the deal.

RELATED TERMS
  1. Note

    A note is a financial security that generally has a longer term ...
  2. Certificate of Indebtedness

    A certificate of indebtedness was something of an "IOU" from ...
  3. Receivables

    Receivables, or accounts receivable, are debts owed to a company ...
  4. Average Outstanding Balance

    An average outstanding balance is the unpaid, interest-bearing ...
  5. Accounts Payable - AP

    Accounts payable (AP) is an accounting entry that's found on ...
  6. Amortized Loan

    An amortized loan is a loan with scheduled periodic payments ...
Related Articles
  1. Insights

    China Owns US Debt, but How Much?

    See how much U.S. debt is actually owned by the Chinese, what it means to the economy, and why China is willing to lend so much money.
  2. Investing

    Beginner's Guide To Trading Fixed Income

    Beginner's Guide To Trading Fixed Income
  3. Managing Wealth

    Stocks Remain The Best Long-Term Bet

    When looking at a wide set of data, it becomes clear that stocks are still the best way to maximize a portfolio's long-term growth potential.
  4. Tech

    Is 'Buy and Hold' the Best Bitcoin Investment Strategy?

    Volatility is one of the major issues within the cryptocurrency world. Is it best to buy and hold, not letting the day-to-day changes phase you?
  5. Personal Finance

    The 7 Best Places to Put Your Savings

    You work hard to put your money away for the future, but where should you keep it?
  6. Retirement

    Common Questions About Social Security

    Find answers to the 10 Social Security questions that most people ask, from how to apply for benefits to how secure the system is.
  7. Investing

    How to adjust a portfolio in a bear or bull market

    Investors shouldn't panic at the market's daily moves, but small adjustments in the face of a bull or bear market could be a prudent move.
  8. Investing

    The Importance Of Analyzing Accounts Receivable

    While investors often focus on revenues, net income, and earnings per share, they should not overlook the importance of analyzing accounts receivable.
  9. Personal Finance

    To Lend or Not to Lend: That Is the Question

    When lending money to a family member, set up an agreement to protect your money and relationship.
RELATED FAQS
  1. How long are accounts receivable allowed to be outstanding?

    Learn about accounts receivable, including how long they typically remain outstanding, and how their payment or lack of payment ... Read Answer >>
  2. How should investors interpret accounts receivable information on a company's balance ...

    Analyze accounts receivable information on a company's balance sheet carefully. Receivables offer confidence of future cash ... Read Answer >>
  3. Are Certificates of Deposit (CDs) a Type of Bond?

    Certificates of deposit (CDs) and bonds are both fixed-income securities that are generally held until maturity. Learn how ... Read Answer >>
Trading Center