1. CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 20-1 Promissory Notes Original created by M.C. McLaughlin, Thomson/South-Western Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School

2. CENTURY 21 ACCOUNTING © Thomson/South-Western PROMISSORY NOTES Promissory notes are used when money is borrowed for a period of time from a bank or other lending agency A written and signed promise to pay a sum of money at a specified time is called a promissory note 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 & accounts receivable or payable – they can be useful in a court of law as written evidence of a debt 2 LESSON 20-1

3. CENTURY 21 ACCOUNTING © Thomson/South-Western USES OF PROMISSORY NOTES A person or organization to whom a liability is owed is called a creditor Promissory notes signed by a business & given to a creditor are called notes payable 3 LESSON 20-1

4. CENTURY 21 ACCOUNTING © Thomson/South-Western PARTS OF A PROMISSORY NOTE Number of a Note – the number assigned to identify a specific note Date of a note – the day a note is signed Payee of a note – the person or business to whom the amount of a note is payable Time of a note – the days, months, or years from the date of signing until a note is to be paid 4 LESSON 20-1

5. CENTURY 21 ACCOUNTING © Thomson/South-Western PARTS OF A PROMISSORY NOTE Principal of a note – the original amount of a note; sometimes referred to a the face amount of a note Interest rate of a note – the percentage of the principal that is paid for use of the money Maturity date of a note – the date a note is due Maker of a note – the person or business who signs a note and thus promises to make payment 5 LESSON 20-1

6. CENTURY 21 ACCOUNTING © Thomson/South-Western 6 LESSON 20-1 USES OF PROMISSORY NOTES page 589 1. 1.Number 8. 8.Maker 7. 7.Maturity date 6. 6.Interest rate 5. 5.Principle 3. 3.Payee 2. 2.Date of a note 4. 4.Time of a note

7. CENTURY 21 ACCOUNTING © Thomson/South-Western 7 LESSON 20-1 Interest for One Year = Time in Years × Interest Rate ×Principal INTEREST ON PROMISSORY NOTES page 590 Interest for One Year $1,200.00=1×6%×$20,000.00 Interest for Fraction of Year = Time as Fraction of Year × Interest Rate ×Principal Interest for Fraction of Year $300.00=×6%×$20,000.00 90 360  An amount paid for the use of money for a period of time is called interest  The interest rate is stated as a percentage of the principal

8. CENTURY 21 ACCOUNTING © Thomson/South-Western 8 LESSON 20-1 Maturity Value =Interest+Principal INTEREST ON PROMISSORY NOTES page 590 Maturity Value $20,300.00=$300.00+$20,000.00  A 90 day note with a principal of $20,000 and interest rate of 6% will have a maturity value of $20,300  The amount that is due on the maturity date of a note is called the maturity value

9. CENTURY 21 ACCOUNTING © Thomson/South-Western 9 LESSON 20-1 MATURITY DATE OF PROMISSORY NOTES page 591 May 18, 90-Day Note May18–May 3113 days June30 days July31 days August 1–August 1616 days Total90 days 3 4 1 2 1.Subtract the date of the note from the number of days in the first month. 2.Add 30 days for June. 3.Add 31 days for July. 4.Add only 16 days in August. A 90 day note dated May 18 th is due on August 16th

10. CENTURY 21 ACCOUNTING © Thomson/South-Western 10 LESSON 20-1 TERMS REVIEW number of a note date of a note payee of a note time of a note principal of a note interest rate of a note maturity date of a note maker of a note promissory note creditor notes payable interest maturity value page 592