B I O U S

Most often, an IOU probably is produced in the heat of business as a sort of memorandum of intent and may be followed up with a more businesslike written agreement. [Important: The term IOU has become so familiar that it crops up in other contexts. A bond contract is sometimes called an IOU.]

Key Takeaways. An IOU is a written acknowledgment of a debt. In business transactions, an IOU may be followed by a more formal written contract. The term IOU is used in bookkeeping to refer to accounts receivable.

The informal nature of an IOU means there may be uncertainty about whether it is a binding contract, and the legal remedies may be harder to enforce than a formal contract such as a promissory note or a bond indenture. Due to this uncertainty, an IOU is generally not considered a negotiable instrument.

The IOU is thus an accounts receivable item and is counted as an asset on the balance sheet. How exactly it is recorded depends on the time frame: If the money is due in one year or less, the IOU is recorded as a current asset. If the payment is due more than a year down the road, it is recorded as a long-term asset.