Notes Payable and Receivable Professor Eric Carstensen MiraCosta College http://www.miracosta.edu/instruction/accounting/index.html

What is a Note? Notes are signed promises to repay a loan, including interest rate and due date. Depending on whether you are the borrower or the lender, a note can be a payable (liability) or receivable (asset). Most notes are for periods of less than one year, however, they can be for longer periods. We will focus on simple interest notes, but, will compare with simple discount notes later.

Simple Interest We use the term simple interest because interest is calculated just once (as opposed to compound interest, where interest is figured more often). Interest = Principle * Rate * Time Principle is the amount borrowed / lent Rate is the annual percentage rate Time is expressed in years or fractions of years (each month is 30 days; each year is 360 days)

Quick Example Assume that on January 1st, $20,000 is borrowed at 6.0% interest for a period of three months. How much interest will be due at the end of of those 3 months? I = P * R * T I = 20,000 * .06 * (90/360) I = 300

Two Standpoints Borrower's Books: Lender's Books: cash 20,000 01-01 cash 20,000 notes receivable notes payable 01-31 interest expense 100 interest receivable interest payable interest income 02-28 03-31 20,300 200

Simple Interest vs. Simple Discount Simple Interest Note   Simple Discount Note Interest Calculation: I = Principal * Rate Time 20,000 0.06 90/360 300 Maturity Value: MV Face Value + Interest 20,300 Proceeds: Proceeds Maturity Value - Discount (Interest) - 19,700 Effective Rate: 0.0609 6.0% 6.09%