What is an IOU?

An IOU (“I Owe You”) is a very basic form of legal agreement used in business. It’s a written form of acknowledgement from one party to another expressing the latter’s debt or obligation. Usually informal in nature, an IOU is not generally a legally binding contract, although it may be followed up with a more typical written agreement.

While IOUs are widely used in many types of business transactions, due to their informal nature, it can often be difficult to enforce. All the same, an IOU is an important record in acknowledging a debt, and it can be used to prove its existence (i.e., IOUs act as evidence of a loan).

IOUs are distinct from more traditional forms of legal obligations. Unlike promissory notes, which are legally enforceable and can be sold or traded, an IOU isn’t as formal or legally binding as promissory notes, and generally cannot be used as leverage to recoup debts.

In addition, IOUs are often used in the context of bookkeeping to refer to money that a customer or business is expected to pay back in the future: in this case, an IOU typically takes the form of an accounts receivable. Accounts receivable is often considered part of an organization’s assets and can be used to recoup any debts incurred due to overdue payments or fees.

An IOU is a useful, albeit informal, tool for documenting debt or an obligation that must be paid in the future. While it lacks the legal enforceability of other written agreements, it is nevertheless a important record of debt or an obligation that must be honored.