NOTES

Students must understand the concepts about promissory notes that are listed below to
be able to apply the procedures to prepare journal entries related to notes payable
and notes receivable.

 A promissory note is a written and signed promise to pay a sum of money on a

specific date.
 Promissory notes are used when a business borrows money from a bank or other
lending agency for a period of time. These are called Notes Payable.
 Businesses may request a note from a customer who wants credit beyond the
usual time given for sales on account. These are called Notes Receivable.
 Notes can be useful in a court of law as written evidence of a debt.
 The time of a note issued for less than one year is usually stated in days. The
time used in calculating interest is usually stated as a fraction of 360 days.
 The time between the date a note is signed and the date a note is due (maturity
date) is typically expressed in days. The maturity date is calculated by counting
the exact number of days. The date on which the note is written is not counted,
but the maturity date is counted.
 Students may have difficulty knowing or remembering the number of days in each
month. Teachers may teach students the nursery rhyme (Thirty Days Hath
September) or the knuckles and valleys method to determine the number of days
in each month. These ideas can be found by following these links:
http://www.jetcityorange.com/days-of-the-month/ (includes a You-Tube video)
http://www.eudesign.com/mnems/dayspcm.htm
http://www.instructables.com/id/Easy-way-to-remember-the-days-in-each-month/

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 CONTENT

I. Calculating Interest, Maturity Date, and Maturity Value on a Note

A. Interest = Principal X Interest Rate X Time in Years
B. Maturity Date
Example: 90-day Note, signed May 18, Maturity Date is August 16
1. Calculate the number of days remaining in May (13) by subtracting the date
of the note (18) from the number of days in May (31): 31 – 18 = 13.
2. Calculate the number of days remaining in the term of the note (77) by
subtracting the number of days in the previous month (13) from the term of
the note (90). Because 77 is greater than the number of days in June (30),
add all of the days in June (30).
3. Calculate the number of days remaining in the term of the note (47) by
subtracting the number of days in the previous months, 43 (13+30), from
the term of the note, 90. Because 43 is greater than the number of days in
July (31), add all of the days in July (31).
4. Calculate the number of days remaining in the term of the note (16) by
subtracting the number of days in the previous months, 74 (13+30+31),
from the term of the note, 90: 90 – 74 = 16. Because 16 is less than the
number of days in August (31), add only 16 days in August. The Maturity
Date is August 16.
C. Maturity Value = Principal + Interest

II. Procedures for Journalizing Notes Payable Transactions

A. Issuance of a note payable
1. Write the date in the Date column of the Cash Receipts Journal.
2. Write the receipt number in the Doc. No. column.
3. Debit Cash for the principal amount of the note.
4. Credit Notes Payable for the principal amount of the note.
B. Payment of principal and interest on a note payable
1. Write the date in the Date column of the Cash Payments Journal.
2. Write the check number in the Doc. No. column.
3. Debit Notes Payable for the principal amount of the note.
4. Debit Interest Expense for the amount of the interest paid.
5. Credit Cash for the total amount paid (maturity value of the note).
C. A note payable issued for an extension of time
1. Write the date in the Date column of the General Journal.
2. Debit Accounts Payable (referencing the appropriate vendor account) for
the principal amount of the note.
3. Credit Notes Payable for the principal amount of the note.
D. Payment on a note payable for an extension of time
1. Write the date in the Date column of the Cash Payments Journal.
2. Write the check number in the Doc. No. column.
3. Debit Notes Payable for the principal amount of the note.
4. Debit Interest Expense for the interest paid.
5. Credit Cash for the total amount paid.

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III. Procedures for Journalizing Notes Receivable Transactions
A. Acceptance of a note receivable from a customer
1. Write the date in the Date column of the General Journal.
2. Write the note number in the Doc. No. column.
3. Debit Notes Receivable for the principal amount of the note.
4. Credit Accounts Receivable (referencing the appropriate customer) for the
principal amount of the note.
B. Collection of principal and interest on a note receivable
1. Write the date in the Date column of the Cash Receipts Journal.
2. Write the receipt number in the Doc. No. column.
3. Debit Cash for the total amount received (maturity value of the note
receivable).
4. Credit Interest Income for the amount of the interest received.
5. Credit Notes Receivable for the principal amount of the note.
C. A dishonored note receivable
1. Write the date in the Date column of the General Journal.
2. Debit Accounts Receivable (referencing the appropriate customer account)
for the total amount of the note, including interest due.
3. Credit Notes Receivable for the principal amount of the note.
4. Credit Interest Income for the interest due on the note.

KEY TERMS

 Promissory note  Current liabilities

 Creditor  Long-term liabilities
 Note payable  Interest-bearing note
 Principal (face value  Non-interest-bearing note
 Term (time  Bank discount
 Issue date  Proceeds
 Payee  Interest Expense
 Maturity date  Note receivable
 Maker  Interest income
 Maturity value  Dishonored note

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5.01 Calculating Interest, Maturity Date, and Maturity Value
Fill in the blanks with the correct information.

Calculating Interest
The amount paid for the use of money for a period of time is called .

X X = Interest for One Year

Example: $20,000.00 X 6% X 1 = $

X X = Interest for Fraction of Year

Example: $20,000.00 X 6% X 90/360 =

Calculating Maturity Date

The maturity date is calculated by counting the . The
date on which the note is is not counted, but the
date is counted.

Example: Date of 90-day Note – May 18th

May 18-May 31 = 13 days
June = 30 days
July = 31 days
August 1-August 16 = 16 days
Total = 90 days

Calculating Maturity Value

The amount that is due on the maturity date of a note is called the
.

+ =
Example: $20,000.00 + $300.00 = $

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5.01 Calculating Interest, Maturity Date, and Maturity Value –
Calculating Interest
The amount paid for the use of money for a period of time is called interest.

Principal X Interest Rate X Time in Years = Interest for One Year

Example: $20,000.00 X 6% X 1 = $1,200.00

Principal X Interest Rate X Time as Fraction of Year = Interest for Fraction of Year
Example: $20,000.00 X 6% X 90/360 = $300.00

Calculating Maturity Date

The maturity date is calculated by counting the exact number of days.
The date on which the note is written is not counted, but the maturity date
is counted.

Example: Date of 90-day Note – May 18th

May 18-May 31 = 13 days
June = 30 days
July = 31 days
August 1-August 16 = 16 days
Total = 90 days

Calculating Maturity Value

The amount that is due on the maturity date of a note is called the maturity
value.

Principal + Interest = Maturity Value

Example: $20,000.00 + $300.00 = $20,300.00

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5.01 Journalizing Notes Payable and Notes Receivable
Transactions

Fill in the accounts to complete the entries.

1. Journalizing the Issuance of a Note Payable

Debit
Credit

2. Journalizing the Payment of Principal and Interest on a Note Payable

Debit
Debit
Credit

3. Journalizing a Note Payable for an Extension of Time

Debit
Credit

4. Journalizing Payment on a Note Payable for an Extension of Time

Debit
Debit
Credit

5. Journalizing the Acceptance of a Note Receivable from a Customer

Debit
Credit

6. Journalizing the Collection of Principal and Interest on a Note Receivable

Debit
Credit
Credit

7. Journalizing a Dishonored Note Receivable

Debit
Credit
Credit

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5.01 Journalizing Notes Payable and Notes Receivable
Transactions

Fill in the accounts to complete the entries.

1. Journalizing the Issuance of a Note Payable

Debit Cash
Credit Notes Payable

2. Journalizing the Payment of Principal and Interest on a Note Payable

Debit Notes Payable

Debit Interest Expense
Credit Cash

3. Journalizing a Note Payable for an Extension of Time

Debit Accounts Payable (using the appropriate vendor account)

Credit Notes Payable

4. Journalizing Payment on a Note Payable for an Extension of Time

Debit Notes Payable

Debit Interest Expense
Credit Cash

5. Journalizing the Acceptance of a Note Receivable from a Customer

Debit Notes Receivable

Credit Accounts Receivable (referencing the appropriate customer)

6. Journalizing the Collection of Principal and Interest on a Note Receivable

Debit Cash
Credit Notes Receivable
Credit Interest Income

7. Journalizing a Dishonored Note Receivable

Debit Accounts Receivable (referencing the appropriate customer)

Credit Notes Receivable

Credit Interest Income

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5.01 KEY TERMS

TERM DEFINITION
Promissory note A written promise to pay a certain amount of money at
a specific time
Creditor A person or organization to whom a liability is owed

Note payable A promissory note that a business issues to a creditor

when it borrows or buys on credit
Principal (face value) Amount being borrowed

Term (time) Amount of time ( stated in days, months, or years) the

borrower has to repay the note
Issue date Date on which the note is written and signed

Payee The person or business to whom the amount of a note

is payable
Interest rate Fee charged for use of money; a percentage of the
principal
Maturity date Date a note is due

Maker The person or business borrowing money by note and

promising to repay the principal and interest
Maturity value The amount due at the due date

Current liabilities Liabilities due within a short time, usually within a year

Long-term liabilities Liabilities that are due after one year

Interest-bearing note A note that requires payment of the principal plus

interest on the maturity date
Non-interest-bearing note A note that requires the interest to be paid in advance;
interest is deducted from the face value of the note
Bank discount Interest on a note that is deducted in advance

Proceeds The cash received by the borrower; equals face value

less any bank discount
Interest Expense General ledger account used to record interest paid on
a note; classified as an Other Expense
Note receivable Promissory note that a business accepts from a
customer
Interest income Interest earned on a note receivable; general ledger
account classified as Other Income
Dishonored note A note that is not paid when due

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 Notes Payable and Notes Receivable

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