Notes Payable

State Yes or No

Bank loan agreement
➛ Yes

Supplier invoice due in 30 days
➛ No | Accounts Payable

Mortgage payable over 10 years
➛ Yes

Electricity bill unpaid
➛ No

Loan from a friend with a signed agreement
➛ Yes

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

Borrowing money using a promissory note
➛ Credit Notes Payable

Repaying the principal of a note
➛ Debit Notes Payable

Accruing interest on a note
➛ No entry to Notes Payable
Interest Expense Dr | Interest Payable Cr

Converting Accounts Payable into a note
➛ Credit Notes Payable

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

➛ Calculate the interest

➛ Record the adjusting entry
➛ Record the payment at maturity

Given
Principal = $6,000
Rate = 12%
Time = 6 months

1. Interest Calculation
6,000 × 12

2. Adjusting Entry


3. Payment at Maturity

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

6-month bank loan
➛ Current Notes Payable

3-year equipment loan
➛ Long-Term Notes Payable

Mortgage payable in 15 years
➛ Long-Term Notes Payable

Note due in 9 months
➛ Current Notes Payable

Note due in 18 months
➛ Long-Term Notes Payable

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?
➛ Notes Payable

Is this a current or long-term liability?
➛ Current liability

How much interest will accrue in one year?
➛ 20,000 x 8

What adjusting entry is needed at year-end?
➛

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

What is Notes Payable?
➛ A written promise to repay borrowed money with interest

Does Notes Payable usually earn interest?
➛ Yes

Notes Payable always require a written agreement.
➛ True

Name one difference between Notes Payable and Accounts Payable.
➛ Notes Payable is formal and earns interest; Accounts Payable is informal and interest-free

Where does Notes Payable appear in the balance sheet?
➛ Liabilities section | current or long-term

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Interest Calculations & Amortization ➧ Here