Chapter 23: Accounting for Notes & Interest By: Audrey Marshall For Advanced Accounting.

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Presentation transcript:

Chapter 23: Accounting for Notes & Interest By: Audrey Marshall For Advanced Accounting

Promissory Notes Promissory note: a written and signed promise to pay a sum of money at a specified time Promissory note: a written and signed promise to pay a sum of money at a specified time Interest: an amt. paid for the use of money for a period of time Interest: an amt. paid for the use of money for a period of time Principal x interest rate x time as a = interest for fraction of year fraction of year Principal x interest rate x time as a = interest for fraction of year fraction of year Maturity Value: the amt. that is due on the maturity date of a note Maturity Value: the amt. that is due on the maturity date of a note Principal + Interest = Maturity Value Principal + Interest = Maturity Value Maturity Date is calculated by counting the exact number of days Maturity Date is calculated by counting the exact number of days Example: A 90-Day note dated March 13 is due on June 11.

Notes Payable Current liabilities: liabilities due within a short time, usually within a year Current liabilities: liabilities due within a short time, usually within a year Example: March 13 Signed a 90-Day, 10% note, $5, Receipt No You would write the acct. title, Notes Payable, in corresponding column and debit Cash and credit Notes Payable in the Cash Receipts journal. Interest Expense: the interest accrued on money borrowed Interest Expense: the interest accrued on money borrowed Example: June 11. Paid cash for the maturity value of the March 13 note: principal, $5,000.00, plus interest, $125.00; total, $5, Check No You would debit Notes Payable and Interest Expense and credit Cash in the Cash Payments journal.

Notes Payable (cont.) A business may ask for an extension of time if it is unable to pay an account when due so the business signs a note payable. A business may ask for an extension of time if it is unable to pay an account when due so the business signs a note payable. Example: April 5. Winning Edge signed a 60-day, 18% note to Pollard Supply for an extension time on its account payable, $3, Memorandum No You would debit Accounts Payable and Pollard Supply and credit Notes Payable in the General journal. Paying a note payable issued for an extension of time Paying a note payable issued for an extension of time Example: June 4. Paid cash for the maturity date value of the note payable to Pollard Supply: principal, $3,000.00, plus interest, $90.00; total, $3, Check No You would debit Notes Payable and Interest Expense and credit Cash in the Cash Payment journal.

Notes Receivable Notes Receivable: promissory notes that a business accepts from customers Notes Receivable: promissory notes that a business accepts from customers Example: April 22. Accepted a 90-Day, 18% note from Peter Ange for an extension of time on his account, $1, Notes Receivable No. 7. -You would debit Notes Receivable and credit Accounts Receivable and Peter Ange account in the General journal. Interest Income: the interest earned on money loaned Interest Income: the interest earned on money loaned Example: July 21. Received cash for the maturity value of Notes Receivable No. 7, a 90-day, 18% note: principal, $1,000.00, plus interest, $45.00; total, $1, Receipt No You would debit Cash and credit Notes Receivable and Interest Income in the Cash Receipts journal.

Notes Receivable (cont.) Dishonored note: a note that is not paid when due Dishonored note: a note that is not paid when due Example: May 15. Pam Carter dishonored Note Receivable No. 9, a 90-day, 18% note, maturity value due today: principal, $400.00; interest, $18.00; total, $ Memorandum No You would debit Accounts Receivable and Pam Carter account and credit Notes Receivable and Interest Income.