1. Accounting 3
Chapter 23

2. 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.

3. 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.

4. 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.

5. 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

6. 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.

7. 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, principal at 12% interest rate.
$1, (P) x 12% (IR) x 1 (TIY)= $120.00

8. 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, loan at 12% interest.
$1, x 12% x 60/360 = $20.00
This answer should be rounded up to the nearest dollar.

9. 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, $20.00 = $

10. 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)

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

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

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