1. CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 20-2 Notes Payable Obj. 5.01 – Apply procedures to prepare journal entries for notes payable & notes receivable transactions Original created by M.C. McLaughlin, Thomson/South-Western Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School

2. CENTURY 21 ACCOUNTING © Thomson/South-Western SIGNING A NOTE PAYABLE Liabilities due within a short time, usually within a year, are called current liabilities Notes payable are generally paid within one year, so they are classified as current liabilities When a business signs a note payable, the principal or face amount of the note is credited to a liability account titled Notes Payable 2 LESSON 20-2

3. CENTURY 21 ACCOUNTING © Thomson/South-Western 3 LESSON 20-2 SIGNING A NOTE PAYABLE 1 2345 page 593 May 18. Signed a 90-day, 6% note, $20,000.00. Receipt No. 345. 1.Write the date. 2.Write the account title. 3.Write the receipt number. 4.Write the principle amount in the General Credit column. 5.Write the same amount in the Cash Debit column.

4. CENTURY 21 ACCOUNTING © Thomson/South-Western PAYING PRINCIPLE AND INTEREST ON A NOTE PAYABLE 4 LESSON 20-2  When a note payable reaches its maturity date, the maker of the note pays the maturity value to the payee  The interest accrued on money borrowed is called interest expense  The interest accrued on a note payable is debited to an expense account titled Interest Expense  Interest expense is a financial expense rather than an expense of the business’s normal operations – it is listed in Other Expenses on the income statement

5. CENTURY 21 ACCOUNTING © Thomson/South-Western 5 LESSON 20-2 PAYING PRINCIPLE AND INTEREST ON A NOTE PAYABLE 1 2 34 56 page 594 August 16. Paid cash for the maturity value of the May 18 note: principal, $20,000.00, plus interest, $300.00; total, $20,300.00. Check No. 721. 7 1.Write the date.6.Write the interest expense amount. 2.Write the account title. 7.Write the amount of cash paid. 3.Write the check number. 4.Write the note’s principal amount. 5.Write the account title.

6. CENTURY 21 ACCOUNTING © Thomson/South-Western 6 LESSON 20-2 SIGNING A NOTE PAYABLE FOR AN EXTENSION OF TIME 1 2 page 595 June 5. Restaurant Supply signed a 90-day, 12% note to Hayport Company for an extension of time on its account payable, $4,000.00. Memorandum No. 66. 2. Credit to Notes Payable 1. Debit to Accounts Payable  A business may ask for an extension of time if it is unable to pay an account when due  The form of the liability is changed from an account payable to a note payable

7. CENTURY 21 ACCOUNTING © Thomson/South-Western 7 LESSON 20-2 PAYING A NOTE PAYABLE ISSUED FOR AN EXTENSION OF TIME page 596 September 3. Paid cash for the maturity value of the note payable to Hayport Company: principal, $4,000.00, plus interest, $120.00; total, $4,120.00. Check No. 722.  The entry to record the cash payment at the maturity date of a note payable is the same regardless of the reason the note was signed

8. CENTURY 21 ACCOUNTING © Thomson/South-Western 8 LESSON 20-2 TERMS REVIEW current liabilities interest expense page 597