JournaldrillNotes payable
When a business borrows with a promissory note, it debits Cash and credits Notes Payable for the principal. Interest accrues with time (Dr Interest Expense / Cr Interest Payable at period end). At maturity it debits Notes Payable for the principal and Interest Expense for the interest, and credits Cash for the total.
Syntax
Issue: Dr Cash / Cr Notes Payable; Maturity: Dr Notes Payable (principal), Dr Interest Expense / Cr Cash (principal + interest)| Part | What it is |
|---|---|
Notes Payable | Liability for the principal; current if due within a year, otherwise long-term. |
Interest Expense | Principal x annual rate x time outstanding. |
Interest Payable | Liability for interest accrued but unpaid at a balance sheet date. |
Maturity value | Principal plus total interest, the cash paid at maturity. |
Examples
Dr Cash 20,000 / Cr Notes Payable 20,000Result: Assets up 20,000, liabilities up 20,000
Bank lends 20,000 on a 90-day, 8% note.
Dr Notes Payable 20,000, Dr Interest Expense 400 / Cr Cash 20,400Result: Liability cleared, expense 400, cash down 20,400
Paid at maturity: 20,000 x 8% x 90/360 = 400 interest.
Dr Equipment 12,000 / Cr Cash 4,000, Cr Notes Payable 8,000Result: Assets up 8,000 net, liabilities up 8,000
A note can also be given to a supplier instead of cash.
Common mistakes
- Recording the maturity value as the liability at issue: the note is recorded at principal; interest is expensed as time passes.
- Skipping the accrual when a note crosses a year end: interest for the days before year end belongs to that year.
- Treating the repayment of principal as an expense: only the interest portion is an expense; the principal reduces the liability.
Practice Notes payable
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- Borrowing with a noteOn March 1, Tallgrass Bakery borrows $50,000 from its bank by signing a 6-month, 8% note payable. Interest is due at maturity. Record the borrowing on March 1.
- Paying a note at maturityOn November 1, Redstone Signs signed a $30,000, 6-month, 6% note payable. On December 31 it correctly accrued $300 of interest for two months. On April 30, the maturity date, Redstone pays the note and all interest. Record the April 30 payment.
- Accrued interest on a noteOn September 1, Copper Kettle Cafe borrowed $24,000 from its bank by signing a one-year, 6% note payable. Principal and all interest are due at the end of the year. Record the interest adjusting entry on December 31.
Questions
What is the journal entry for a note payable?
Debit Cash (or the asset received) and credit Notes Payable for the principal when the note is signed.
How is interest on a note payable calculated?
Principal times the annual interest rate times the fraction of the year the note is outstanding, for example 20,000 x 8% x 90/360 = 400.
Is a note payable a current liability?
It is current if it matures within one year of the balance sheet date; the portion due later is long-term.
Related
- Accrued interestHow to accrue interest on a note at period end: Dr Interest Expense, Cr Interest Payable (borrower) or Dr Interest Receivable, Cr Interest Revenue (lender).
- Notes receivableHow to record a promissory note from a customer: Dr Notes Receivable, Cr Accounts Receivable; accrue interest income; collect at maturity; dishonored notes.
- Purchase on accountHow to record buying on credit: debit the asset or expense received and credit Accounts Payable. Examples for supplies, equipment and merchandise.
- Bonds issued at par, discount or premiumHow to record a bond issue: Dr Cash, Cr Bonds Payable at face, with Discount on Bonds Payable (debit) or Premium on Bonds Payable (credit) for the difference.