IOU — Definition, Use, and Practical Guidance

What is an IOU?

An IOU (“I owe you”) is a written acknowledgment that one party owes a debt to another. It is an informal record of a loan or unpaid obligation that documents the existence and amount of the debt but often omits detailed repayment terms. IOUs are commonly used between individuals or between businesses that have ongoing relationships as a temporary or simple memorandum of intent to repay.

Key takeaways

• An IOU records that a debt exists but is typically informal and may lack enforceable terms.
• It usually includes the parties, amount owed, date, and the borrower’s signature.
• More detailed documents (promissory notes, loan agreements) are generally more legally enforceable.
• IOUs are often recorded as accounts receivable on a company’s balance sheet.

How IOUs work

IOUs are usually created quickly—sometimes in meetings or at delivery—as a simple promise to pay. Because there is no standard format, the enforceability of an IOU depends on how much it specifies:
* Minimal IOU: borrower’s name, lender’s name, amount, date, borrower’s signature.
* More complete IOU: adds repayment date, payment method, interest rate, repayment schedule, guarantor, and governing law.

Due to their informality, IOUs are typically not negotiable instruments and cannot easily be sold or transferred. Courts can consider IOUs as evidence of debt, but enforceability increases with greater detail and formalization.

Example

A supplier delivers materials to Smithco Bricks. Smithco pays a down payment and issues an IOU promising to pay the remaining balance within 30 days. Because the supplier and Smithco have an established relationship, the supplier accepts the IOU as a short-term credit arrangement.

Accounting treatment

When recorded by a company:
* If payment is due within one year: recorded as a current asset (accounts receivable).
* If due after more than one year: recorded as a long-term asset.

IOUs vs. promissory notes

Both documents acknowledge debt, but they differ in formality and detail:
* IOU: informal, may only state the amount owed and a repayment date; often signed only by the borrower.
* Promissory note: formal, typically labeled as a “promissory note,” includes interest rate, payment schedule, repayment amounts, signatures of both parties, and is often witnessed or notarized. When sufficiently unconditional, a promissory note may be a negotiable instrument and is generally more enforceable in court.

Statute of limitations for enforcing promissory notes varies by jurisdiction (commonly 3–15 years). In some cases, courts treat each missed payment as starting its own limitations period.

How to write a useful IOU

Minimum elements:
* Borrower’s name
* Lender’s name
* Amount owed
* Date of the IOU
* Repayment date (or due date)
* Borrower’s signature

Recommended additions to increase clarity and enforceability:
* Repayment method (lump sum or installments)
* Repayment schedule (amounts and frequency)
* Interest rate (if any)
* Consequences of nonpayment (late fees, penalties)
* Guarantor, if applicable
* Governing law (which state’s law applies)
* Lender’s signature
* Notary acknowledgment (optional but helpful)

Templates are available online to help ensure key details are included.

Legal enforceability and notarization

An IOU can be introduced in court as evidence that a debt exists, but its binding and enforceable nature depends on how specific and complete it is. Notarization is not required but can strengthen the document by confirming signatures and making it appear more formal, increasing the likelihood of enforcement.

Bottom line

An IOU is a practical, informal way to document that one party owes money to another. It is best used for small sums or between parties with established trust. For larger loans or situations where legal enforceability is important, use a promissory note or a formal loan agreement with clear terms, signatures, and, if appropriate, notarization.