Accounting 3 Chapter 23

Accounting for Notes and Interest Sometimes businesses need cash before the money from sales comes in. When this happens, borrowing is necessary in order to cover expenses. Also in some cases, customers may not be able to pay their accounts on time and need an extension. When this happens, “lending” (or credit extensions) is necessary.

Uses of Promissory Notes Promissory Note - A written and signed promise to pay a sum of money at a specified time. Creditor- A person or organization to whom a liability is owed. Notes Payable - Promissory notes signed by a business and given to a creditor. *These are often referred to as notes.

Promissory Notes These are used when money is borrowed for a period of time from a bank or other lending agency. Sometimes a business requests a note from a customer who wants credit beyond the usual time given for sales on account. Notes have an advantage over oral promises and accounts receivable or payable because they can be used in a court of law as written evidence of a debt.

Promissory Notes Example: PROMISSORY NOTE Cristina Stephens, President Payee of Note PROMISSORY NOTE Note No. ______ Date ______________ Name ___________________________________________________________________ For value received, I or We, the signers, promise to pay to the order of ________________ of ________________, _________ days from date, the principal sum of ______________. ________________________________________________________________ DOLLARS With interest from date at the rate of ___________ % per year, due on _______________. _________________________________________ 1276 Jan 12, 2007 Winning Edge, Inc. Time of Note CHARTER STATE Atlanta, GA 180 $10,000.00 Principal of Note Ten Thousand and 00/100 12 July 11, 2007 Cristina Stephens, President Winning Edge, Inc. Maturity Date of Note Interest Rate of Note Maker of Note

Interest on Promissory Notes Interest – An amount paid for the use of money for a period of time. The interest rate is stated as a percentage of the principal. In example: an interest rate of 10% means that 10 cents will be paid for the use of each dollar borrowed for a full year.

Interest on Promissory Notes To calculate the interest for one year, the principal is multiplied by the interest rate. Formula: Principal X Interest Rate X Time in Years = Interest for one year Example: A one year loan with $1,000.00 principal at 12% interest rate. $1,000.00 (P) x 12% (IR) x 1 (TIY)= $120.00

Interest on Promissory Notes If the time of a note is less than one year, it is typically stated in number of days, such as 30, 60, or 90 days. Formula to calculate: Principal X Interest Rate X Time as Fraction of One Year = Interest for Fraction of Year Example: A 60 day, $1,000.00 loan at 12% interest. $1,000.00 x 12% x 60/360 = $20.00 This answer should be rounded up to the nearest dollar.

Interest on Promissory Notes Maturity Value – The amount that is due on the maturity date of a note. To calculate the maturity value : Formula: Principal + Interest=Maturity Value Example: Previous 60 day loan $1,000.00 + $20.00 = $1020.00

Maturity Date on Promissory Notes The time between the date a note is signed and the date a note is due is typically expressed in days. It is calculated by counting the exact number of days. The date it is written is not counted, but the maturity date is counted. Example: 90 day note dated March 13 is due on June 11. (Details on next slide)

Maturity Date March 13, 90-day note: March 13-March 31 = 18 days April = 30 days May = 31 days June 1-11 = 11 days 90 days

Work Together p. 597 Date Principal Interest Rate Time Interest Maturity Date Maturity Value Mar 3 $6,000 12% 90 days $180 June 1 $6,180 Mar 18 $2,000 18% 60 days $60 May 17 $2,060 $6,000 x 12% x 90/360 = $180 Mar 3-31 = 28 days Apr = 30 days May = 31 days June 1 = 1 day 90 days $6000 + $180 = $6180 Mar 18-31 = 13 days Apr = 30 days May 1-17 = 17 days 60 days $2,000 x 18% x 60/360 = $60 $2000 + $60 = $2060 Assignment

Assignment Do 23-1 Application Problem by hand. Turn into Mrs. Middleton. Move on to Section 23-2.