Final answer:
The discount on notes payable is a contra liability account used by the lender to represent the discount received when a borrower pays back a loan before its maturity date.
Step-by-step explanation:
The discount on notes payable is an account used by the lender to represent the discount received when a borrower pays back a loan before its maturity date. It is a contra liability account, meaning it is subtracted from the notes payable account on the balance sheet.
For example, if a lender provides a loan of $10,000 with a 10% interest rate, and the borrower pays back $9,000 before the loan's maturity date, the lender may record a discount of $1,000 on notes payable.
This account helps the lender accurately reflect the reduced amount of money they will receive as a result of the early repayment of the loan.