What is IOU?

Learn about IOU with Jim Carrey

Case breakdown: Movie Dumb & Dumber:

The scene that you just saw shows how instead of money the suitcase contains IOUs,  Llyod( played by Jim Carrey) says they (IOUs)are as good as money. Let’s understand what are IOUs and if Llyod is right.

What are IOUs?

IOUs is a credit instrument which informally means ‘I owe you’. It doesn’t have a legal standing as that of a promissory note. IOU is a signed (not necessarily) informal note which is a notice of an unpaid debt. In businesses it is generally followed by a formal written agreement.

Since it isn’t formal, there is a lot of uncertainty attached to this instrument. It is also called a non-negotiable instrument. A bond contract sometimes maybe called as a IOU.

How does IOU work?

IOU are recorded as accounts receivables as a current asset of the business on the balance sheet. IOU maybe called a written acknowledgement of debt. Since there isn’t a standardized format of IOU, recovering money is a challenge.

When a company buys raw material from a supplier, it agrees to pay the partial money when it sells the finished good as then it would have sufficient cash flow to do the same. Therefore the company makes the down-payment of partial amount and agrees to pay balance after sale of finished good. In good faith the company writes a IOU to the supplier for the balance amount.

A Promissory note includes a promise to pay. It has a standardized format and contains an unconditional promise to pay. Hence, they are a negotiable instrument. They are widely used for business transactions. It contains the principal amount, interest rate, terms of payment, parties and maturity dates.

When Llyod says that IOUs are as good as money, that statement isn’t correct as IOU does not have terms of contract or signature plus there isn’t any legal standing of the document to recover the money.

Written by: Ms. Gitika Chandra

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