Accounting
Chapter 23 Notes
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Cash is the primary medium of exchange for business transactions
Sometimes will need to make deposits of excess cash or take out a loan to
pay for business when shortage of cash
Section 1
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Parts of a Promissory Note
o Number of Note
o Date of Note
o Payee of Note
o Time of Note
o Principal of Note
o Interest Rate of Note
o Maturity Date of Note
o Maker of Note
Promissory Notes are used when money is borrowed for a period of time
from a bank
Notes can be used in court as written evidence of a debt
Interest rate is stated as a percentage of the principal
Principal x Interest Rte x Time in Years = Interest for One Year
Principal x Interest Rate x Time as fraction of year (days/360) = Interest
for a fraction of a year as expressed in days
Maturity Value: Principal + Interest = Maturity Value
Maturity Date of Promissory Note
o Subtract the date of the note from the number of days in the first
month
o Add all the days of the next month and so on
o Add days necessary to get to note time in last month
Section 2
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Notes payable are classified as current liabilities
When a business signs a note payable, the principal or face amount of the
note is credited to a liability account – Notes Payable. (Debit cash and
credit Notes Payable in Cash Receipts Journal)
No entry is made for interest until a later date when the interest is paid
The interest accrued on a note payable is debited to an expense account
called Interest Expense
Interest Expense is a financial expense so it is classified in Chart of
Accounts as Other Expenses
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Paying a Note Payable Off with Interest
o Cash payments journal: Debit Notes Payable and Interest Expense
and credit Cash (2 line entry)
A business may ask for an extension of time if it is unable to pay an
account when due
Vendor might have the business sign a note payable
This changes the liability from an account payable to a note payable
Journalizing signing a note payable for an extension of time
o Record a debit to Accounts Payable/Vendor Name
o Record a credit to Notes Payable
o All in the General Journal
Section 3
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A customer who is unable to pay an account on the due date may request
additional time – business should require the customer to sign a note
The asset is changed from an account receivable to a note receivable
Promissory Note is written confirmation of the amount owed
In General Journal: debit Notes Receivable and credit Accounts
Receivable/Customer Name
When a note receivable reaches its maturity date, the payee receives the
maturity value from the maker
Interest Income: the interest earned on money loaned
Interest earned on a note receivables is credited to a revenue account title
Interest Income
Interest Income is investment revenue and is listed under Other Revenue
in the Chart of Accounts
Cash Receipts Journal – paid off note receivable: debit cash and credit
Notes Receivable and Interest Income
After the entry is recorded, the original Note Receivable is marked paid
and given to the customer. The business keeps a copy for their records
The amount of a dishonored note receivable should be removed from the
Notes Receivable Account and flipped to an Accounts Receivable and
customer name
The amount of the note plus interest is still owed by the customer and the
business will still try to collect the amount due
In General Journal: debit Accounts Receivable/Customer Name and credit
Notes Receivable and Interest Income
If at a later date the business decides that the amount is uncollectible,
they will write it off with a debit to Allowance for Uncollectible Accounts
and a credit to Accounts Receivable/Customer Name