Notes Payable

Module 3:
Cash, Receivables, Payables

Duration:
45-60 minutes

Level:
Beginner to Diploma-Level

➛ 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

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

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

Issuing a Note
Borrowed $10,000 from a bank

Recording Interest | Accrual
Interest = Principal × Rate × Time

Example
$10,000 × 10% × 3/12 = $250

Paying the Note at Maturity

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

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

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

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

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

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

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?

➛ 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?

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Answers ➧ Here

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Interest Calculations & Amortization ➧ Here