Ga CH26

Unit 5
Accounting for Special Procedures
Chapter 22 Cash Funds

Chapter 23 Plant Assets and Depreciation
Chapter 24 Uncollectible Accounts Receivable
Chapter 25 Inventories
Chapter 26 Notes Payable and Receivable
Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 0
Chapter 26
Notes Payable and Receivable
What You’ll Learn

 Explain how businesses use promissory notes.
 Calculate and record notes payable and notes
receivable.
 Explain the difference between interest-bearing and
non-interest-bearing notes.
 Journalize transactions involving notes payable.
 Journalize transactions involving notes receivable.
 Define the accounting terms introduced in this
chapter.
Chapter 26, Section 1
Promissory Notes
What Do You Think?

What does the term interest mean?
SECTION 26.1 Promissory Notes
Main Idea
The formula for calculating interest is
principal x interest rate x time.
You Will Learn

 how promissory notes are used.
 how to calculate the interest on a note.
Key Terms
 promissory note
 note payable
 note receivable
 principal
 face value
 term
 issue date
 payee
 interest rate
 maturity date
 maker
Key Terms
 interest
 maturity value
A Promise to Pay
A promissory note is a written promise to pay a certain
amount of money at a specific time.
Notes Payable and Notes Receivable

A note payable is a promissory note that a business
issues to a creditor when it borrows or buys on credit. A
note receivable is a promissory note that a business
accepts from a credit customer.
The parts of a promissory note are:
 Principal or face value
 Term
 Issue date
 Payee
 Interest rate
 Maturity date
 Maker
The Maturity Date of a Note

The period of time in which a note’s maker agrees to
repay the note is the term of the note. The term and the
issue date are needed to determine the maturity date.
To calculate a maturity date using a time calendar:
 Locate the issue date in the Day of month
column. Move across to the issue month to find
the day of the year (September 14 is 257).
 Add the number of days in the term to the day of
the year (90+257=347).
 Find this number in the month columns (347
corresponds to December 13).
The Maturity Date of a Note
Calculation of Interest on a Note

Interest is the fee charged for the use of money. The
interest rate is the interest stated as a percentage of the
principal.
Calculating Interest Using a Formula

Use the following formula to calculate interest:
Interest = Principal x Interest Rate x Time
Interest rates are usually stated on an annual basis. If

the term is less than a year, the time in the calculation is
expressed as a fraction of a year. Maturity value is the
amount due at the due date.
Calculating Interest Using an Interest Table

To calculate interest using an interest table, follow these
steps:
 Find the term of the note in the Day column.
 Follow the row until you reach the column for the
interest rate. Where they intersect is the factor
(per $100 of principal).
 Divide the principal of the note by 100.
 Multiply the result by the factor to find the amount
of interest.
Calculating Interest Using an Interest Table
Key Terms Review

 promissory note
A written promise to pay a certain amount of
money at a specific time.
 note payable
A promissory note issued to a creditor.
 note receivable
A promissory note that a business accepts from a
customer.
 principal
The amount of money borrowed on a promissory
note.
Key Terms Review

 face value
The amount written on the face of a promissory
note; also called principal.
 term
The length of time the borrower has to repay a
promissory note.
 issue date
The date on which a promissory note is written.
 payee
The person or business to whom a check is
written or a note is payable.
Key Terms Review

 interest rate
The fee charged for the use of money stated as a
percentage of the principal.
 maturity date
The due date of a promissory note; the date on
which the principal and interest must be paid.
 maker
The person or business promising to repay the
principal and interest when a loan is made.
Key Terms Review

 interest
The fee charged for the use of money.
 maturity value
The principal plus interest that must be paid on a
promissory note’s due date.
What Do You Think?

What do the terms interest-bearing and
non-interest-bearing mean?
SECTION 26.2 Notes Payable
Main Idea
Businesses issue and accept two types of notes:
interest-bearing notes and non-interest-bearing notes.
You Will Learn

 what an interest-bearing promissory note is.
 why a “non-interest-bearing” note does have
interest expense.
Key Terms
 long-term liabilities
 interest-bearing note payable
 non-interest-bearing note payable
 bank discount
 proceeds
 other expense
Interest-Bearing Notes Payable

Notes issued by a business are recorded in Notes
Payable, a liability account. Long-term liabilities are
debts that become due after one year. An interest-
bearing note payable requires the principle plus
interest to be paid on the maturity date.
Recording the Issuance of an

Interest-Bearing Note Payable
Here is an example of how to record an interest-bearing
note payable.



Recording the Payment of an

Here is an example of how to record the payment of an
interest-bearing note payable.



Non-Interest-Bearing Notes Payable

A non-interest bearing note payable is a note in which
the interest is deducted from the face value of the note
when it is issued. It is called non-interest bearing
because no interest rate is stated on the note.
The interest deducted in advance is the bank discount.

The cash received by the borrower is called the
proceeds. For this type of note, the maturity value is the
same as the face value.
Calculating Non-Interest-Bearing Notes Payable

The proceeds for this non-interest-bearing note,
discounted at 12%, are $1,455.62 (1,500.00-44.38).
Face Value x Discount Rate x Time = Bank Discount
$1,500 x 0.12 x 90/365 = $ 44.38
Recording the Issuance of a

Non-Interest-Bearing Note Payable
The bank discount is recorded in a contra liability
account called Discount on Notes Payable. The
normal balance of Discount on Notes Payable is a
debit. This transaction records the issuance of the non-
interest-bearing note.
Recording the Payment of a Non-Interest-

Bearing Note Payable
When a non-interest-bearing note payable matures, the
amount of the bank discount is recorded as an expense.
Record a matured note using two separate journal
entries or a compound entry:
 the payment of the non-interest-bearing note
payable, and
 the interest expense
The Interest Expense account is classified as an other
expense, which is nonoperating expense. It appears on
the income statement below operating income.
Key Terms Review

 long-term liabilities
Debts that are not required to be paid within the
next accounting period.
 interest-bearing note payable
A note that requires the face value plus interest to
be paid on the maturity date.
 non-interest-bearing note payable
A note from which the interest is deducted in
advance from the face value of the note; no
interest rate is stated on the note.
Key Terms Review

 bank discount
The interest charge deducted in advance on a
non-interest-bearing note payable.
 proceeds
The cash actually received by the borrower on a
non-interest-bearing note payable.
 other expense
A nonoperating expense; an expense that does
not result from the normal operations of the
business.
What Do You Think?

Why should a business record a note receivable
that it accepted?
SECTION 26.3 Notes Receivable
Main Idea
Businesses record the receipt of a note receivable as
well as the payment of the note.
You Will Learn

 how to record a note receivable.
 how to record the payment of a note receivable.
Key Term
 other revenue
Recording the Receipt of a Note Receivable

If a customer needs additional time to pay an account
receivable, he or she might sign a promissory note,
called a note receivable.
The interest earned on a note receivable is recorded in
the Interest Income account, an other revenue
account.

To record the receipt of a note receivable, follow this
example.
Recording the Payment of a

Note Receivable
To record a payment of a note receivable follow this
example.
Key Term Review

 other revenue
Nonoperating revenue that a business receives
from activities other than its normal operation.
CHAPTER 26 Chapter 26 Review
Question 1
Calculate the interest for the following:
Answer 1
Use the formula: Principal  Interest Rate  Time
* $2,500.00  .12  3/12

** Annual Interest = $31.50  3 years
Question 2
Why is interest received from customers considered
“other revenue”?
Answer 2
This is revenue from activities other than the normal
operations of the business. If a company is not in the
business of lending money, the revenue from this
transaction is considered nonoperating revenue.
Resources
Glencoe Accounting Online Learning Center
English Glossary
Spanish Glossary

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Unit 5

Accounting for Special Procedures

Chapter 22 Cash Funds

What You’ll Learn

What Do You Think?

You Will Learn

Notes Payable and Notes Receivable

The Maturity Date of a Note

The Maturity Date of a Note

Calculation of Interest on a Note

Calculating Interest Using a Formula

Interest = Principal x Interest Rate x Time

Interest rates are usually stated on an annual basis. If

Calculating Interest Using an Interest Table

Calculating Interest Using an Interest Table

Key Terms Review

Key Terms Review

Key Terms Review

Key Terms Review

What Do You Think?

You Will Learn

Interest-Bearing Notes Payable

Recording the Issuance of an

Recording the Issuance of an

Recording the Issuance of an

Recording the Issuance of an

Recording the Payment of an

Recording the Payment of an

Recording the Payment of an

Recording the Payment of an

Non-Interest-Bearing Notes Payable

The interest deducted in advance is the bank discount.

Calculating Non-Interest-Bearing Notes Payable

Recording the Issuance of a

Recording the Payment of a Non-Interest-

Key Terms Review

Key Terms Review

What Do You Think?

You Will Learn

Recording the Receipt of a Note Receivable

Recording the Receipt of a Note Receivable

Recording the Receipt of a Note Receivable

Recording the Receipt of a Note Receivable

Recording the Receipt of a Note Receivable

Recording the Payment of a

Key Term Review

* $2,500.00  .12  3/12

Glencoe Accounting Online Learning Center

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