Chapter 7 Accounting for Promissory Note Ibrahim Sammour

Promissory Note Definition: Promissory Note A promissory note is a certificate that obliges the one who signs it to pay an amount of money at sight or at a certain date for a beneficiary.

Promissory Note A promissory note is a written instrument, containing an unconditional understanding, signed by the maker, to pay a certain sum of money only to, or to the order of a certain person

Promissory Note This definition given by law means that when a person gives a promise in writing to pay a certain sum of money unconditionally to another person (named) or according to his instructions, the document is a promissory note.

Promissory Note the essentials are: 1- It must be in writing. 2- It must contain a clear promise to pay. 3- The promise to pay must be unconditional. 4- The promissory (Maker) must sign the promissory note.

Promissory Note 5- The maker must be a certain person. 6- The payee must also be a certain person. 7- The sum payable must be certain "I promise to pay USD 1000". 8- Payment must be in legal money of the country.

Promissory Note Parties of Promissory note: 1- Promissor or maker: The maker is the person who promises to pay a certain amount on demand or at future date. He prepare? the note, he is the debtor.

Promissory Note Parties of Promissory note: 2- Payee or promise: The payee is the person, in whose favor the note is made and who is ultimately entitled or to receive money on the note.

Promissory Note Some important terms of Promissory notes: 1- Due date (Maturity date) 2- Discounting of bill 3- Dishonor of a bill 4- Noting, Protesting and noting charges 5- Renewal of a bill

Promissory Note 1- Due date (Maturity date): It is a date on which the bill becomes due for payment.

Promissory Note 2- Discounting of bill: It is a process where by the holder in due course enchases the bill before maturity by selling the bill to the bank. Bank charges a nominal amount for enchasing the bill before due date. Such amount deducted by the bank from the bill amount, while paying the bill amount before due date, is termed as "Discount".

Promissory Note 3- Dishonor of a bill: On maturity, when the drawee or acceptor of the bill refuses to make payment, the act is called "Dishonor".

Promissory Note 4- Noting, Protesting and noting charges: If the bill is dishonored by the drawee on presentation of payment, the fact must be legally established. The court charges a nominal amount, which is called "Noting charges". These noting charges are finally to be recovered from the drawee.

Promissory Note 5- Renewal of a bill: It is drawing of a new bill in the place of an old bill with extension of a period of payments on request made by the drawee. The new bill is drawn after maturity of the original bill. Interest at a nominal market rate is charged from the drawee.

Promissory Note Sometimes the drawee pays some amount of the original bill with or without interest and accepts a new bill of the balance amount with or without interest.

Promissory Note Steps taken on the renewal of a bill: 1- Cancellation of the old bill. 2- Recording of interest due from the drawee. 3- Recording the receipts of cash from the drawee in part payment of the original bill, with or without interest. 4- Drawing a new bill and acceptance received from drawee for balance amount, with or without interest.

Promissory Note A person who receives a promissory note can adopt three courses: 1 - Keep it till the date of maturity. 2- Pass it to one of his creditors. 3- Get it discounted with a bank. 4- Pass it to the bank to get more facilities.

Promissory Note Conditions of Passing \ Endorsement: 1- It must be in writing, and it could be with sights or named. 2- The passing must be signed. 3- It must be comprehensive.

Promissory Note How banks deal with Promissory note: 1- Accepting the bill from customers for collection. 2- To discount the bill in favor of customers. 3- Accepting the bill as collateral to make loans.

Promissory Note Functions of Promissory departments at bank: 1- Receiving the bills from customers, branches and other banks, and audit it to make sure from its legal. 2- Noting customers in receiving bills, and following up the procedures of bills.

Promissory Note Functions of Promissory departments at bank: 3- Noting debtors before maturity date and following the collection process of the bills. 4- Organizing, documents and notes and making the financial transaction of the bills. 5- Following up the discounted customers.

Promissory Note Financial transactions of Promissory note: 1- Bills deposited for collection:

Bills deposited for collection: Steps of collection (Documentary cycle): 1- Filling the receipt of bill collection, including all data about the bill and client; such as "bill No., Amount, Due date, Beneficiary...etc." 2- Auditing the bill and checking it with the receipt of the bill. 3- Keeping the bills according to the maturity date.

Bills deposited for collection: Steps of collection (Documentary cycle): 4- Sending a copy of the deposit receipt to the Accounting department to make the accounting entries for it. 5- Sending notes to the customer a week before the maturity date, to remind them of repayment. 6- Making the accounting entries.

Bills deposited for collection: Financial transaction for depositing and collecting of bills : 1- Receiving promissory notes: Notes receivable *** Depositors of Notes receivable ***

Bills deposited for collection: 2-Collecting of bank commission: Current ac. Of customer *** OR Treasury *** Commission ***

Bills deposited for collection: 3-When sending the notes to branches or correspondents for collecting: Branches (Sent for collecting) *** OR Correspondent (Sent for collecting) *** Notes receivable ***.

Bills deposited for collection: 4- When collecting: Current account *** OR Treasury (If paid in treasury) *** OR Branches (If collected from branches) *** OR Correspondent (If collected from Corr.Bank)*** Customer current account ***

Bills deposited for collection: 5- Conciliation of regular entries: Depositor of notes receivable *** Notes receivables *** Notes sending for collection *** Branches \ Correspondent ***

Bills deposited for collection: 6- When collecting the commission from the branches OR Correspondent: Commission *** Branches *** OR Correspondent ***

Bills deposited for collection: When debtor refuses to repay the Promissory Notes: Protesting and Noting Charges *** Treasury *** A proof of paying the value of the protesting

Bills deposited for collection: Customer Current account *** Protesting and Noting Charges *** Recording expenses on the customers ‘ current accounts

Bills deposited for collection: Depositors of Notes receivable *** Notes receivables *** A proof of the cancellation of the value of the receivable note

Promissory Notes Discounted: Financial transaction for Notes discounted: 1- When the bank receive the notes for discounted: Discounted Notes *** Depositors of Discounted Notes ***

Promissory Notes Discounted: 2- When the bank accepts the notes for discounting: Discounted Notes *** Treasury *** Discount interest *** Discount commission ***

Promissory Notes Discounted: 3- When repaying the notes at the due date: Treasury *** OR Current Account *** Discounted Notes ***

Promissory Notes Discounted: 4- When the debtor refuses to repay the notes and making the Protesting Protesting and Noting Charges *** Treasury ***

Promissory Notes Discounted: 5- Recording the amount of notes and protesting on the customer's account: Current account *** Protesting and Noting Charges ***

Promissory Notes Discounted: Current account (customer) *** Discounted notes *** Depositors of discounted notes *** Discounted notes ***

Promissory Notes Discounted: Financial transaction when collecting the notes through branches or correspondents:

Promissory Notes Discounted: 1- When sending notes to the branches or correspondents: Branches OR Correspondents *** Discounted notes sent for collecting ***

Promissory Notes Discounted: 2- When Collecting from branches OR correspondents: Discounted notes sent for collecting *** Discounted Notes ***

Promissory Notes Discounted: 3- When recording the commission for the branches OR correspondents: Commission of notes collections *** Branches OR correspondents ***

Promissory Notes Discounted: 4--When debtor refuses to repay the notes in the branches: Discounted notes sent for collecting *** Branches OR correspondents *** Canceling sending notes to branches or correspondents

Promissory Notes Discounted: Current accounts (customers) *** Discounted Notes *** Recording the value of discounted notes on the customers' Current accounts

Promissory Notes Discounted: Current account *** Branches OR correspondents *** Recording protesting charges of the customers' accounts Depositors of discounted Notes *** Discounted Notes *** Canceling entries of receiving notes

Example

The following figures are from the records of the National Bank: 1- Total of notes for collection 100,000 $ (commission 1%). 2- Total of sent notes for collection to branches is 50,000 $. 3- Total of collecting notes is 40,000 $, and collecting from discounted notes from current accounts is 20,000 $.

Example 4- Total of collecting notes from branches is 30,000 $, and commission is 1%. 5- Total of notes that the debtors refused to repay on the maturity date is 25,000 $, and the protesting is 150 $. 6- Total of notes, which debtors refuse to pay, sent to branch 15,000 $, and protesting is 100 $.

Example 7- Total of discounted notes added to the customers current accounts is 90,000 $, Interest is 2,500 $, and commission is 1,200 $. 8- Total of discounted notes which are due and repaid is 40,000 $. 9- Total of discounted notes which are due and did not repay is 9,000 $, and the protesting is 200 $. 10- Total of discounted notes which has been sent for collection through branches is 22,000 $.

Example Required: Recording the central journal entries.

End of Chapter 6