Georgia CTAE Resource Network
Instructional Resources Office
Written by: Dr. Marilynn K. Skinner
May 2009
Accounting for Liabilities
Current Liabilities

Debts of a company that are paid
with current assets.
Debt that is paid off within a year
Notes Payable
Debts of a company that result in the
company signing a negotiable loan
instrument (note)
Notes may be:
Interest Bearing – Interest accrues
as the note matures.
Non-Interest Bearing – the interest
is included in the face value
(principal) of the note
Interest Bearing Note
Example: On August 20 Spectrum Electronics
purchased $1,000 in merchandise on account
from Jetto Enterprises, the terms were n/30. On
September 19, Spectrum could not pay the
amount and asked Jetto to accept a note
payable on the account
Date
Description
Debit
8/20
Accts. Pay/Jetto
1,000
Notes Payable
Credit
1,000
Paying an Interest Bearing
Note Payable
On December 18 Spectrum paid the principal
plus interest back to Jetto
Date
Description
Debit
12/18
Note Payable
1,000.00
Interest Expense*
Cash
•
*Principal X Interest Rate X TIME = Interest
1,000.00 X .10 X
90/365 = 24.66
Credit
24.66
1024.66
Adjusting for Accrued Interest
Example: On December 22 Spectrum issued a note payable to
Jetto for $3000. The terms of the note were 30 days at 11%.
Complete the entry for accrued interest at December 31.
Date
Description
Debit
12/31
Interest Expense
8.14
Interest Payable
•
Principal
3000
X
X
Credit
8.14
Interest Rate X Time = Interest
.11
X
9/365 = 8.14
Adjusting for Accrued Interest
Example: On December 22 Spectrum issued a note payable to
Jetto for $3000. The terms of the note were 30 days at 11%.
Complete the entry for the payment of the note on January
21.
Date
Description
Debit
1/21
Note Payable
3000.00
Interest Payable
8.14
Interest Expense
18.98
Cash in Bank
•
Principal
3000
X
X
Credit
3027.12
Interest Rate X Time = Interest
.11
X
21/365 = 18.98
Noninterest Bearing Note
Payable
Also called a discounted note
payable
 Bank requires borrower to pay
interest at time loan is issued
 Borrower receives less than face
value of note at time of the loan.

Noninterest Bearing Note
Payable Example
On February 15 Spectrum issued a
$4,200, 60-day noninterest bearing note,
discounted at 12%. What are the
proceeds from the note?
Face value X Discount Rate X Time = Bank Discount
4,200.00 X .12
X
60/365 =
82.85
Face Value
4,200.00
- Bank Discount = Proceeds
82.85
= 4,117.15
Recording a Noninterest
Bearing Note
On February 15 Spectrum issued a $4,200, 60day noninterest bearing note, discounted at
12%. What is the entry to record the note?
Date
2/15
Description
Cash in Bank
Discount on Notes Payable
Notes Payable
Debit
Credit
4117.15
82.58
4200.00
Recording Payment of a
Noninterest Bearing Note
On April 16 Spectrum paid the $4,200, 60-day
noninterest bearing note, discounted at 12%.
What is the entry to record the note?
Date
4/16
Description
Interest Expense
Notes Payable
Discount on note payable
Cash in Bank
Debit
Credit
82.85
4200.00
82.85
4200.00
Adjusting for Accrued Interest
for a Noninterest Bearing Note
On December 16 Spectrum issued a $2,500, 45-day
noninterest bearing note, discounted at 12%.
What is the entry to record the accrual of interest
on December 31?
Date
Description
Debit
12/31
Interest Expense
12.33
Discount on Notes Payable
Credit
12.33
Principal X Interest Rate X Time = Interest
2,500 X .12
X
15/365 = 12.33
Adjusting for Accrued Interest
for a Noninterest Bearing Note
On December 16 Spectrum issued a $2,500, 45-day
noninterest bearing note, discounted at 12%.
What is the entry to record the payment of the
note on January 30?
Date
Description
Debit
1/30
Interest Expense
24.66
Notes Payable
2500.00
Credit
Discount on Notes Payable
24.66
Cash in Bank
2500.00