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 NOTENote 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.

CHARTER STATE

Atlanta, GA 180 $10,000.00

Ten Thousand and 00/100

12 July 11, 2007

Cristina Stephens, PresidentWinning Edge, Inc.

Maker of Note

Time of Note

Principal of Note

Interest Rate of Note

Maturity Date of Note

Payee 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 yearExample: 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 ValueExample: 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 daysApril = 30 daysMay = 31 daysJune 1-11 = 11 days

90 days

Work Together p. 597

Date Principal Interest Rate Time Interest Maturity Date Maturity ValueMar 3 $6,000 12% 90 days

$180 June 1 $6,180Mar 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

$2,000 x 18% x 60/360 = $60Mar 18-31 = 13 days

Apr = 30 days

May 1-17 = 17 days

60 days

$6000 + $180 = $6180

$2000 + $60 = $2060

Assignment

Assignment

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