Accounting for Notes and Interest

2

Promissory note – a written and signed promise to pay a sum of money at a specific time

Creditor – a person or organization to whom a liability is owed

Notes payable – promissory notes signed by a business and given to a creditor

*Notes have an advantage over oral promises and accounts receivable or payable – can be useful in a court of law as written evidence of a debt

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1.1. Number1.1. Number

8.8. Maker8.8. Maker 7.7. Maturity date7.7. Maturity date6.6. Interest rate6.6. Interest rate5.5. Principle5.5. Principle

3.3. Payee3.3. Payee

2.2. Date of a note2.2. Date of a note4.4. Time of a note4.4. Time of a note

4

Interest – an amount paid for the use of money for a period of time

Maturity value– the amount that is due on the maturity date of a note

*Sometimes partial payments on a note are made each month (car payment)

*Each monthly payment includes part of the principal amount owed and part of the interest

*When calculating notes, use 360 days in a year

5 LESSON 20-1

Interest forOne Year

=Time inYears

×Interest

Rate×Principal

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Interest for One Year

$1,200.00=1×6%×$20,000.00

Interest forFraction of

Year=

Time as Fraction of

Year×

InterestRate

×Principal

Interest for Fraction of Year

$300.00=×6%×$20,000.0090

360

6 LESSON 20-1

Maturity Value

=Interest+Principal

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Maturity Value

$20,300.00=$300.00+$20,000.00

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May 18, 90-Day NoteMay18–May 31 13 days

June 30 days

July 31 days

August 1–August 16 16 days

Total 90 days

3344

1122

1. Subtract the date of the note from the number of days in the first month.

2. Add 30 days for June.

3. Add 31 days for July.

4. Add only 16 days in August.

8

Current liabilities – liabilities due within a short time (usually a year)

*A receipt is prepared as the source document for the principal amount of the note (Accounting concept: Objective Evidence)

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May 18. Signed a 90-day, 6% note, $20,000.00. Receipt No. 345.

1. Write the date.

2. Write the account title.

3. Write the receipt number.

4. Write the principle amount in the General Credit column.

5. Write the same amount in the Cash Debit column.

10

Interest expense – interest accrued on money borrowed

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2233 44

5566

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August 16. Paid cash for the maturity value of the May 18 note: principal, $20,000.00, plus interest, $300.00; total, $20,300.00. Check No. 721.

77

1. Write the date. 6. Write the interest expense amount.2. Write the account title.

7. Write the amount of cash paid.

3. Write the check number.4. Write the note’s principal amount.

5. Write the account title.

12

*A business may ask for an extension of time if it is unable to pay an account when due. The vendor may ask the business to sign a note payable

Ex: An accounts payable needs an extension, transferred to a note payable

13 LESSON 20-2

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June 5. Restaurant Supply signed a 90-day, 12% note to Hayport Company for an extension of time on its account payable, $4,000.00. Memorandum No. 66.

2. Credit to Notes Payable

1. Debit to Accounts Payable

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September 3. Paid cash for the maturity value of the note payable to Hayport Company: principal, $4,000.00, plus interest, $120.00; total, $4,120.00. Check No. 722.

15

Notes receivable – promissory notes that a business accepts from customers

*Usually paid within a year, thus classified as current assets

Interest income – interest earned on money loaned

*Classified as “Other Revenue”

Interest Income

16 LESSON 20-3

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22

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April 14. Accepted a 90-day, 8% note from Martin Sterling for an extension of time on his account, $3,000.00. Note Receivable No. 9.

1. Debit to Notes Receivable

2. Credit to Accounts Receivable

17 LESSON 20-3

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July 13. Received cash for the maturity value of Note Receivable No. 9, a 90-day, 8% note: principal, $3,000.00, plus interest, $60.00; total, $3,060.00. Receipt No. 562.

77

1. Write the date.

2. Write the account title.

5. On the next line, write the account title.

3. Write the receipt number. 6. Calculate and write the interest income amount.4. Write the principal amount.

7. Write the maturity value.

18

Dishonored note – a note that is not paid when due

*Transferred back to accounts receivable, interest income earned even though the note has not been paid

*Company does not initially write off an account, they will continue to try and collect the balance

*Later, the company may decide to write off the account and use some of the allowance for uncollectible accounts balance

19 LESSON 20-3

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May 6. Jill Davis dishonored Note Receivable No. 12, a 90-day, 8% note, maturity value due today: principal, $600.00; interest, $12.00; total, $612.00. Memorandum No. 92.

1. Debit to Accounts Receivable

2. Credit to Notes Receivable

3. Credit to Interest Income