Accounting for Notes and Interest
12. Promissory Notes
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
2
USES OF PROMISSORY NOTES
1. Number
4. Time of a note
page 589
2. Date of a note
3. Payee
5. Principle
3
8. Maker
LESSON 20-1
6. Interest rate
7. Maturity date
Promissory Notes
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
4
*When calculating notes, use 360 days in a year
INTEREST ON PROMISSORY NOTES
page 590
Interest for One Year
Principal
×
Interest
Rate
$20,000.00
×
6%
×
Time in
Years
=
Interest for
One Year
×
1
=
$1,200.00
Interest for Fraction of Year
5
Principal
×
Interest
Rate
$20,000.00
×
6%
LESSON 20-1
Time as
× Fraction of =
Year
Interest for
Fraction of
Year
90
360
$300.00
×
=
page 590
INTEREST ON PROMISSORY NOTES
Maturity Value
6
Principal
+
Interest
=
Maturity
Value
$20,000.00
+
$300.00
=
$20,300.00
LESSON 20-1
MATURITY DATE OF PROMISSORY
NOTES
May 18, 90-Day Note
May18–May 31
June
July
August 1–August 16
Total
13 days
30 days
31 days
16 days
90 days
1
2
3
4
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.
7
LESSON 20-1
page 591
13. Notes Payable and Notes
Receivable
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)
8
SIGNING A NOTE PAYABLE
page 593
May 18. Signed a 90-day, 6% note, $20,000.00. Receipt No. 345.
1
2
1.
2.
3.
4.
5.
9
3
4
Write the date.
Write the account title.
Write the receipt number.
Write the principle amount in the General Credit column.
Write the same amount in the Cash Debit column.
LESSON 20-2
5
13. Notes Payable and Notes
Receivable
Interest expense – interest accrued on money borrowed
10
PAYING PRINCIPLE AND INTEREST
ON A NOTE PAYABLE
page 594
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.
2
1
3
6
7
1.
2.
3.
4.
Write the date.
Write the account title.
Write the check number.
Write the note’s
principal amount.
5. Write the account title.
11
4
LESSON 20-2
6. Write the interest
expense amount.
7. Write the amount
of cash paid.
5
13. Notes Payable and Notes
Receivable
*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
12
SIGNING A NOTE PAYABLE FOR AN
EXTENSION OF TIME
page 595
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.
1
2
1. Debit to Accounts Payable
2. Credit to Notes Payable
13
LESSON 20-2
PAYING A NOTE PAYABLE ISSUED
FOR AN EXTENSION OF TIME
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.
14
LESSON 20-2
page 596
13. Notes Payable and Notes
Receivable
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
Interest Income
*Classified as “Other Revenue”
15
ACCEPTING A NOTE RECEIVABLE
FROM A CUSTOMER
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
2
1. Debit to Notes Receivable
2. Credit to Accounts Receivable
16
LESSON 20-3
page 598
COLLECTING PRINCIPAL AND
INTEREST ON A NOTE RECEIVABLE
page 599
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.
2
1
3
5
1.
2.
3.
4.
17
4
6
Write the date.
Write the account title.
Write the receipt number.
Write the principal amount.
LESSON 20-3
7
5. On the next line, write the
account title.
6. Calculate and write the interest
income amount.
7. Write the maturity value.
13. Notes Payable and Notes
Receivable
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
18
RECORDING A DISHONORED NOTE
RECEIVABLE
page 600
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
2
3
1. Debit to Accounts Receivable
2. Credit to Notes Receivable
3. Credit to Interest Income
19
LESSON 20-3