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Section 2Notes Payable What You’ll Learn  The differences between interest- bearing and noninterest-bearing notes.  How to record notes payable transactions.

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Presentation on theme: "Section 2Notes Payable What You’ll Learn  The differences between interest- bearing and noninterest-bearing notes.  How to record notes payable transactions."— Presentation transcript:

1 Section 2Notes Payable What You’ll Learn  The differences between interest- bearing and noninterest-bearing notes.  How to record notes payable transactions.  How to calculate and record bank discounts. What You’ll Learn  The differences between interest- bearing and noninterest-bearing notes.  How to record notes payable transactions.  How to calculate and record bank discounts.

2 Why It’s Important Many businesses issue and make payment on notes payable. Why It’s Important Many businesses issue and make payment on notes payable. Key Terms  long-term liabilities  interest-bearing note payable  noninterest-bearing note payable  bank discount  proceeds  other expense Key Terms  long-term liabilities  interest-bearing note payable  noninterest-bearing note payable  bank discount  proceeds  other expense Section 2Notes Payable (cont'd.)

3 Interest-Bearing Notes Payable  A note payable is a promissory note issued to a creditor.  A note that requires the face value plus interest to be paid on the maturity date is called an interest- bearing note payable.  A note payable is a promissory note issued to a creditor.  A note that requires the face value plus interest to be paid on the maturity date is called an interest- bearing note payable. Section 2Notes Payable (cont'd.)

4 Recording the Issuance of an Interest-Bearing Note Payable Section 2Notes Payable (cont'd.) Business Transaction On April 3, On Your Mark borrowed $7,000 from State Street Bank and issued a 90-day, 12% note payable to the bank, Note 6. ANALYSIS Identify1.The accounts affected are Cash in Bank and Notes Payable. Classify2.Cash in Bank is an asset account. Notes Payable is a liability account. + / –3.Cash in Bank is increased by $7,000. Notes Payable is increased by $7,000.

5 Recording the Issuance of an Interest-Bearing Note Payable (cont'd.) Section 2Notes Payable (cont'd.) Business Transaction (cont'd.) On April 3, On Your Mark borrowed $7,000 from State Street Bank and issued a 90-day, 12% note payable to the bank, Note 6. DEBIT-CREDIT RULE 4.Increases to asset accounts are recorded as debits. Debit Cash in Bank for $7, Increases to liability accounts are recorded as credits. Credit Notes Payable for $7,000.

6 Recording the Issuance of an Interest-Bearing Note Payable (cont'd.) Section 2Notes Payable (cont'd.) Business Transaction (cont'd.) On April 3, On Your Mark borrowed $7,000 from State Street Bank and issued a 90-day, 12% note payable to the bank, Note 6. T ACCOUNTS 6. Cash in Notes BankPayable Debit + 7,000 Credit – Debit – Credit + 7,000

7 Recording the Issuance of an Interest-Bearing Note Payable (cont'd.) Section 2Notes Payable (cont'd.) Business Transaction (cont'd.) On April 3, On Your Mark borrowed $7,000 from State Street Bank and issued a 90-day, 12% note payable to the bank, Note 6. JOURNAL ENTRY 7.

8 Section 2Notes Payable (cont'd.) Business Transaction On July 2, On Your Mark issued Check 3892 for $7, payable to State Street Bank in payment of the note payable issued April 3. The maturity value of the note is $7, ($7, principal + $ interest). ANALYSIS Identify1.The accounts affected are Notes Payable, Interest Expense, and Cash in Bank. Classify2.Notes Payable is a liability account. Interest Expense is an expense account. Cash in Bank is an asset account. + / –3.Notes Payable is decreased by $7,000. Interest Expense is increased by $ Cash in Bank is decreased by $7, Recording the Payment of an Interest-Bearing Note Payable

9 Section 2Notes Payable (cont'd.) Business Transaction (cont'd.) On July 2, On Your Mark issued Check 3892 for $7, payable to State Street Bank in payment of the note payable issued April 3. The maturity value of the note is $7, ($7, principal + $ interest). Recording the Payment of an Interest-Bearing Note Payable (cont'd.) DEBIT-CREDIT RULE 4.Decreases to liability accounts are recorded as debits. Debit Notes Payable for $7,000. Increases to expense accounts are recorded as debits. Debit Interest Expense for $ Decreases to asset accounts are recorded as credits. Credit Cash in Bank for $7,

10 Section 2Notes Payable (cont'd.) Business Transaction (cont'd.) On July 2, On Your Mark issued Check 3892 for $7, payable to State Street Bank in payment of the note payable issued April 3. The maturity value of the note is $7, ($7, principal + $ interest). Recording the Payment of an Interest-Bearing Note Payable (cont'd.) T ACCOUNTS 6. Notes PayableCash in Bank Debit + Interest Expense Debit Credit + Debit – 7,000 Credit – Credit – 7,207.12

11 Section 2Notes Payable (cont'd.) Business Transaction (cont'd.) JOURNAL ENTRY 7. Recording the Payment of an Interest-Bearing Note Payable (cont'd.) On July 2, On Your Mark issued Check 3892 for $7, payable to State Street Bank in payment of the note payable issued April 3. The maturity value of the note is $7, ($7, principal + $ interest).

12  Sometimes a bank requires a borrower to pay the interest on a note in advance.  On the issue date, the bank deducts the interest from the face value of the note.  When interest is deducted in advance from the face value of the note, the note is called a noninterest-bearing note payable.  Sometimes a bank requires a borrower to pay the interest on a note in advance.  On the issue date, the bank deducts the interest from the face value of the note.  When interest is deducted in advance from the face value of the note, the note is called a noninterest-bearing note payable. Noninterest-Bearing Notes Payable Section 2Notes Payable (cont'd.)

13 Calculating Noninterest-Bearing Notes Payable The first step is to calculate the bank discount, which is the interest on the note. Calculating Noninterest-Bearing Notes Payable The first step is to calculate the bank discount, which is the interest on the note. Section 2Notes Payable (cont'd.) FaceDiscountBank Value  Rate  Time = Discount FaceDiscountBank Value  Rate  Time = Discount $1,500 .12  90/365=$44.38

14 Recording the Issuance of a Non- interest-Bearing Note Payable Section 2Notes Payable (cont'd.) Business Transaction On June 12, On Your Mark signed a $1,500, 90-day noninterest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13. ANALYSIS Identify1.The accounts affected are Cash in Bank, Discount on Notes Payable, and Notes Payable. Classify2.Cash in Bank is an asset account. Discount on Notes Payable is a contra liability account. Notes Payable is a liability account. + / –3.Cash in Bank is increased by $1, Discount on Notes Payable is increased by $ Notes Payable is increased by $1,

15 Recording the Issuance of a Non- interest-Bearing Note Payable (cont'd.) Section 2Notes Payable (cont'd.) Business Transaction (cont'd.) On June 12, On Your Mark signed a $1,500, 90-day noninterest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13. DEBIT-CREDIT RULE 4.Increases to asset accounts are recorded as debits. Debit Cash in Bank for $1, Increases to contra liability accounts are recorded as debits. Debit Discount on Notes Payable for $ Increases to liability accounts are recorded as credits. Credit Notes Payable for $1,

16 Section 2Notes Payable (cont'd.) Business Transaction (cont'd.) T ACCOUNTS 6. Cash in BankNotes Payable Debit – Discount on Notes Payable Debit Credit – Debit + 1, Credit – Credit + 1, On June 12, On Your Mark signed a $1,500, 90-day noninterest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13. Recording the Issuance of a Non- interest-Bearing Note Payable (cont'd.)

17 Section 2Notes Payable (cont'd.) Business Transaction (cont'd.) On June 12, On Your Mark signed a $1,500, 90-day noninterest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13. JOURNAL ENTRY 7.

18 Check Your Understanding How is the interest charge calculated for an interest-bearing note and a noninterest-bearing note? Section 2Notes Payable (cont'd.)


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