Notes Payable



Module 3:
Cash, Receivables, Payables

Duration:
45-60 minutes

Level:
Beginner to Diploma-Level


Lesson Objectives

➛ Define Notes Payable

➛ Distinguish between Notes Payable and Accounts Payable

➛ Identify transactions that create Notes Payable

➛ Record Notes Payable journal entries correctly

➛ Calculate interest on Notes Payable

➛ Classify Notes Payable as current or long-term liabilities

➛ Explain how Notes Payable appear in financial statements


Key Vocabulary

➛ Notes Payable
➛ Promissory Note
➛ Principal
➛ Interest
➛ Maturity Date
➛ Interest Rate
➛ Current Liability
➛ Long-Term Liability


What Is Notes Payable?

Notes Payable arise when a business borrows money and signs a formal written agreement (promissory note) promising to repay

➛ Principal
➛ Plus interest
➛ On a specific future date

Common sources
➛ Bank loans
➛ Loans from individuals
➛ Equipment financing


Notes Payable vs Accounts Payable

Notes Payable
Formal written agreement
Interest is charged
Can be long-term
Fixed repayment date

Accounts Payable
Based on invoices
No interest
Short-term only
Usually 30-90 days



Journal Entries for Notes Payable

Issuing a Note
Borrowed $10,000 from a bank

Cash
Notes Payable

Dr 10,000
Cr 10,000



Journal Entries for Notes Payable

Recording Interest | Accrual
Interest = Principal × Rate × Time

Example
$10,000 × 10% × 3/12 = $250

Interest Expense
Interest Payable

Dr 250
Cr 250



Journal Entries for Notes Payable

Paying the Note at Maturity

Notes Payable
Interest Payable
Cash

Dr 10,000
Cr 250
Cr 10,250



Classification in Financial Statements

Current Notes Payable
Due within 12 months

Long-Term Notes Payable
Due after 12 months

On the Balance Sheet
➛ Principal shown under liabilities
➛ Interest Payable shown separately if unpaid


Identify Notes Payable

State Yes or No

➛ Bank loan agreement
➛ Supplier invoice due in 30 days
➛ Mortgage payable over 10 years
➛ Electricity bill unpaid
➛ Loan from a friend with a signed agreement


Debit or Credit?

Indicate Debit (Dr) or Credit (Cr) for Notes Payable

➛ Borrowing money using a promissory note

➛ Repaying the principal of a note

➛ Accruing interest on a note

➛ Converting Accounts Payable into a note


Interest Calculation

A business borrows $6,000 at 12% interest for 6 months.

➛ Calculate the interest
➛ Record the adjusting entry
➛ Record the payment at maturity


Classification

Classify each as Current Notes Payable or Long-Term Notes Payable

➛ 6-month bank loan
➛ 3-year equipment loan
➛ Mortgage payable in 15 years
➛ Note due in 9 months
➛ Note due in 18 months


Mini Case Study

A startup borrowed $20,000 from a bank on January 1 at 8% interest, payable after one year.

Questions

➛ What account is created at borrowing?

➛ Is this a current or long-term liability?

➛ How much interest will accrue in one year?

➛ What adjusting entry is needed at year-end?

➛ What journal entry is recorded when the note is paid?


Quick Quiz

➛ What is Notes Payable?

➛ Does Notes Payable usually earn interest?

➛ True or False | Notes Payable always require a written agreement.

➛ Name one difference between Notes Payable and Accounts Payable.

➛ Where does Notes Payable appear in the balance sheet?

Answers ➧ Here

Interest Calculations & Amortization ➧ Here