1. Notes Payable and Receivable
Professor Eric Carstensen
MiraCosta College

2. 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.

3. 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)

4. 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

5. 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

6. 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%