LESSON 20-1
Promissory Notes
Original created by M.C. McLaughlin, Thomson/South-Western
Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School
CENTURY 21 ACCOUNTING © Thomson/South-Western
2
PROMISSORY NOTES
 Promissory notes are used when money is borrowed for
a period of time from a bank or other lending agency
 A written and signed promise to pay a sum of money at
a specified time is called a promissory note
 Sometimes a business requests a note from a customer
who wants credit beyond the usual time given for sales
on account
 Notes have an advantage over oral promises & accounts
receivable or payable – they can be useful in a court of
law as written evidence of a debt
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 20-1
3
USES OF PROMISSORY NOTES
 A person or organization to whom a liability is owed is
called a creditor
 Promissory notes signed by a business & given to a
creditor are called notes payable
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 20-1
4
PARTS OF A PROMISSORY NOTE
Number of a Note – the number assigned to
identify a specific note
Date of a note – the day a note is signed
Payee of a note – the person or business to whom
the amount of a note is payable
Time of a note – the days, months, or years from
the date of signing until a note is to be paid
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 20-1
5
PARTS OF A PROMISSORY NOTE
Principal of a note – the original amount of a
note; sometimes referred to a the face amount of
a note
Interest rate of a note – the percentage of the
principal that is paid for use of the money
Maturity date of a note – the date a note is due
Maker of a note – the person or business who
signs a note and thus promises to make payment
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 20-1
6
USES OF PROMISSORY NOTES
1. Number
4. Time of a note
page 589
2. Date of a note
3. Payee
5. Principle
8. Maker
6. Interest rate
CENTURY 21 ACCOUNTING © Thomson/South-Western
7. Maturity date
LESSON 20-1
7
INTEREST ON PROMISSORY NOTES
page 590
An amount paid for the use of money for a period of time
is called interest
The interest rate is stated as a percentage of the principal
Interest for One Year
Principal
×
Interest
Rate
×
Time in
Years
=
Interest for
One Year
$20,000.00
×
6%
×
1
=
$1,200.00
=
Interest for
Fraction of Year
Interest for Fraction of Year
Principal
×
Interest
Rate
$20,000.00
×
6%
×
×
CENTURY 21 ACCOUNTING © Thomson/South-Western
Time as
Fraction of
Year
90
360
=
$300.00
LESSON 20-1
8
INTEREST ON PROMISSORY NOTES
page 590
Maturity Value
Principal
+
Interest
=
Maturity
Value
$20,000.00
+
$300.00
=
$20,300.00
A 90 day note with a principal of $20,000 and interest rate of 6% will have a
maturity value of $20,300
The amount that is due on the maturity date of a note is
called the maturity value
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 20-1
9
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
page 591
A 90 day note dated
May 18th is due on
August 16th
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.
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 20-1
10
TERMS REVIEW







number of a note
date of a note
payee of a note
time of a note
principal of a note
interest rate of a note
maturity date of a note
CENTURY 21 ACCOUNTING © Thomson/South-Western
page 592






maker of a note
promissory note
creditor
notes payable
interest
maturity value
LESSON 20-1