Movie Case Study
The above scene shows Llyod (played by Jim Carrey) negotiating with the kidnapper. Llyod brings a suitcase consisting of IOUs, he is quite convinced that IOUs are as good as money. This blog, Learning Perspectives will explore the meaning of IOUs and whether Llyod is correct in his interpretation.
What is IOU?
IOUs is a credit instrument that informally means I owe you. It doesn’t have 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 may be called an IOU.
How does IOU work?
IOUs are recorded as accounts receivables as a current asset of the business on the balance sheet. IOU may be called a written acknowledgment of debt. Since there isn’t a standardized format for IOU, recovering money from the borrower can pose as a challenge.
When a company buys raw material from a supplier, it agrees to pay partial money when it sells the finished goods as then it would have sufficient cash flow to do the same. Therefore the company makes the down payment of a partial amount and agrees to pay the balance after the sale of the finished good. In good faith, the company writes an IOU to the supplier for the balance amount.
Difference between Promissory Note and IOU
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 because IOU does not have any legal standing. It does not have any terms of contract or signature that can be used in court to recover the outstanding money.