Chapter 9 Accounting for Notes Payable, Prepaid Expenses an Accrued Expenses

Note Note is a promise to a person or institution that you will pay them back on a certain date, at a certain time. Note is a promise to a person or institution that you will pay them back on a certain date, at a certain time.

Borrowing money with a note payable. Cash Receipt Journal DateAccount Title Doc No. Post Ref General Acct Rec Credit Sales Credit Sales Tax Payable Sales Discount Debit Cash Debit CreditDebitCredit 2-MarNotes PayableR

Determining the Maturity Date Use the knuckle drill to determine the date Use the knuckle drill to determine the date

Paying a Note Payable We owe the bank some money plus a little bit more – that additional amount is called interest. When we pay the additional money it is an expense to use We put it into an account called interest expense When we receive the money it is income We put it into a account called interest income

Paying the note back……. Principle x Rate x Time = Interest Owed % 180/ Cash Payments Journal DateAccount Title CK NO Post Ref General Accounts Pay Debit Cash Credit DebitCredit Aug29Notes Payable Interest Expense 75

Section 9-2 Prepaid Expense Prepaid Expense –Expenses paid in one fiscal period but not reported as expense until a later fiscal period. Supplies Supplies Prepaid Insurance Prepaid Insurance Advertising Advertising Income Taxes Income Taxes

Prepaid Expenses May be recorded initially as a asset or expense. May be recorded initially as a asset or expense. Prepaid Expenses are assets until they are used. Prepaid Expenses are assets until they are used.

Lets see if we can make sense of this. Using it as recorded as an asset (the way we have been doing it since last year) Supplies- SalesCash 1000 When we record it as an Expense here is what happens Supplies Expense - SalesCash 1000 This amount represents the amount of the beginning sales supplies inventory plus the total amount of all sales supplies bought during the fiscal period.

When we do adjusting entries Supplies- Sales 1000 The old way Supplies Expense - Sales This amount represents how much is left in inventory This represents how much it has changed. The new way- we go back into the warehouse and take a physical count of what we have and we find out that there is $800 in supplies left here is what we need to do…. Supplies Expense - Sales 1000 Supplies- Sales When this entry occurs we have created a balance in an account that did not previously have a balance and it requires a reversing entry at the beginning of the next year.

Closing Entries Income Summary Supplies Expense - Sales OLD WAY New Way Supplies Expense - Sales 1000 Supplies- Sales 800 adj 200 When we do an adjusting entry that creates a balance in a Asset or Liability account that did not previously have a balance we have to do a reversing entry after the closing entry. Income Summary 200 clos 0

Reversing Entry Supplies- Sales 800 adj Because we had a adjusting entry that put a balance in an asset account we must put the expense account where it was before we did the adjusting entry. Supplies Expense- Sales 800 rev 0 General JournalPage 1 Date Account TitleDoc NoPost RefDebitCredit Reversing Entries Jan1Supplies Expense - Sales 800 Supplies - Sales 800

9-3 Accrued Expenses Expenses incurred in one fiscal period but not paid until a later fiscal period. Expenses incurred in one fiscal period but not paid until a later fiscal period. –Accrued Interest Expense –Accrued Salary Expense –Accrued Employer Payroll Taxes Expense –Accrued Federal Income Tax Expense

Journalizing Accrued Interest Expense We received money from the bank on a 60 day, 10% note payable for 7,500 on December 16 th. We received money from the bank on a 60 day, 10% note payable for 7,500 on December 16 th. So we have to determine how much interest was accrued in the first 15 days of this note. So we have to determine how much interest was accrued in the first 15 days of this note.

Here is where we are at…… We issued a note to the bank saying that we would pay an amount Dec 16th Dec 31st Journalizing Accrued Interest Expense Principle x Rate x Time = Interest % 15/360 = $31.25 $ $93.75

Journalizing the adjusting entry at the end of the year. General JournalPage 1 Date Account TitleDoc NoPost RefDebitCredit Adjusting Entries Dec31Interest Expense Interest Payable Interest Expense Interest Payable adj Remember that this created a balance in a Asset or Liability account that did not previously have one. So at the beginning of next year we have to do a reversing entry. General JournalPage 1 Date Account TitleDoc NoPost RefDebitCredit Reversing Entries Jan1Interest Payable Interest Expense 31.25

General JournalPage 1 Date Account TitleDoc NoPost RefDebitCredit Reversing Entries Jan1Interest Payable Interest Expense Interest Expense Interest Payable adj clo Income Summary clo rev

Payment of the note when it is due. So on February 13 th the note is due. We must record the payment of the money and show how it effects our interest expense account. Interest Expense Cash Payments Journal DateAccount Title CK NOPost Ref General Accounts Pay Debit Cash Cre dit DebitCredit Feb13Notes Payable Interest Expense Which is the amount we figured to be remaining after the beginning of the year.

If our pay period rolls over into the next year, we can record those expenses in this years books and pay them next year. We would adjust our payroll accounts this way. Remember that we are recording them as expenses but we are not paying them and using our liability accounts to hold what we owe until next year. General JournalPage 1 Date Account TitleDoc NoPost RefDebitCredit Adjusting Entries Salary Expense - Administrative 750 Salary Expense - Sales 850 Salary Expense - Warehouse 450 Salaries Payable 1560 Employee Inc. Tax Payable 326 Social Security Tax Payable Medicare Tax Payable 30.75

Reversing Entries General JournalPage 1 Date Account Title Doc No Post RefDebitCredit Reversing Entries Salaries Payable 1560 Employee Inc. Tax Payable 326 Social Security Tax Payable Medicare Tax Payable Salary Expense - Administrative 750 Salary Expense - Sales 850 Salary Expense - Warehouse 450

Other entries There are examples of There are examples of –Payroll Tax Expense –Federal Income Tax Expense –At the end of the chapter that you will also need.

Problems 9-1,2,3,4 9-1,2,3,4