Notes Payable and Notes Receivable

2.  Notes Payable and Notes Receivable  Section 1: Accounting for Notes Payable Chapter 15 discussed accounting principles and applications for accounts receivable. In Chapter 16, students will learn how to account for notes receivable and notes payable, emphasizing the treatment of interest. Chapter 15 discussed accounting principles and applications for accounts receivable. In Chapter 16, students will learn how to account for notes receivable and notes payable, emphasizing the treatment of interest.

4. What is a negotiable instrument? A negotiable instrument is a financial document containing a promise or order to pay that meets all the uniform commercial code requirements to be transferable to another party.What is a negotiable instrument? A negotiable instrument is a financial document containing a promise or order to pay that meets all the uniform commercial code requirements to be transferable to another party.

5. The uniform commercial code has been adopted by all fifty states.The uniform commercial code has been adopted by all fifty states.

6. Objective 1. Determine whether an instrument meets all the requirements for negotiability. The first objective of this chapter is to determine whether an instrument meets all the requirements for negotiability.The first objective of this chapter is to determine whether an instrument meets all the requirements for negotiability.

7. The UCC requirements for negotiability include five elements. They are: Number one, the financial instrument must be in writing and signed by the maker; Number two, the financial instrument must contain an unconditional promise to pay a definite amount of money; Number three, the financial instrument must be payable either on demand or at a future time that is fixed or that can be determined; Number four, the financial instrument must be payable to the order of a specific person or to the bearer; and finally Number five, the financial instrument must clearly name or identify the drawee if addressed to a drawee.The UCC requirements for negotiability include five elements. They are: Number one, the financial instrument must be in writing and signed by the maker; Number two, the financial instrument must contain an unconditional promise to pay a definite amount of money; Number three, the financial instrument must be payable either on demand or at a future time that is fixed or that can be determined; Number four, the financial instrument must be payable to the order of a specific person or to the bearer; and finally Number five, the financial instrument must clearly name or identify the drawee if addressed to a drawee.

9. What is a note payable? A note payable is a liability that represents a written promise made by a debtor to pay the creditor a specified amount at a specified future date.What is a note payable? A note payable is a liability that represents a written promise made by a debtor to pay the creditor a specified amount at a specified future date.

10. Objective 2. Calculate The Interest On A Note. The second objective of this chapter is to calculate the interest on a note.The second objective of this chapter is to calculate the interest on a note.

11. What is interest? Interest is the fee charged for the borrowing of money.What is interest? Interest is the fee charged for the borrowing of money.

12. The formula for calculating interest is to multiply the principal times the interest rate times the time. Notice that the principle is the amount being borrowed, or sometimes call the face value. The time element of the formula in expressed in months of a year.The formula for calculating interest is to multiply the principal times the interest rate times the time. Notice that the principle is the amount being borrowed, or sometimes call the face value. The time element of the formula in expressed in months of a year.

13. What is a banker’s year? A banker’s year is a three-hundred sixty day time period used to calculate interest on a note. What is a banker’s year? A banker’s year is a three-hundred sixty day time period used to calculate interest on a note.

14. Notice in this example the time element of the equation uses three-hundred sixty days for the denominator.Notice in this example the time element of the equation uses three-hundred sixty days for the denominator.

15. Objective 3. Determine The Maturity Date of a Note. The third objective of this chapter is to determine the maturity date of a note.The third objective of this chapter is to determine the maturity date of a note.

16. What is maturity value? Maturity value is the total amount of a note that must be paid when due. It includes both the principle and the interest.What is maturity value? Maturity value is the total amount of a note that must be paid when due. It includes both the principle and the interest.

17. The maturity value of the note in this example includes the principle amount of two-thousand five-hundred dollars plus the seventy-five dollars of interest.The maturity value of the note in this example includes the principle amount of two-thousand five-hundred dollars plus the seventy-five dollars of interest.

18. Calculating the maturity date of a note includes four steps. First, determine the number of days remaining in the month of issue. Second, determine the number of days in each full month of the note. Third, determine the number of days in the last month of the note, and finally, add the days together in the first three steps to confirm that they equal the period of the note.Calculating the maturity date of a note includes four steps. First, determine the number of days remaining in the month of issue. Second, determine the number of days in each full month of the note. Third, determine the number of days in the last month of the note, and finally, add the days together in the first three steps to confirm that they equal the period of the note.

19. In this example, a 90-day note was issued on May 18. First, the number of days remain in May is calculated to be thirteen. That leaves seventy-seven days before maturity. Next, thirty days in June and thirty-one days in July, which represent full months, are subtracted leaving the maturity date of August sixteenth.In this example, a 90-day note was issued on May 18. First, the number of days remain in May is calculated to be thirteen. That leaves seventy-seven days before maturity. Next, thirty days in June and thirty-one days in July, which represent full months, are subtracted leaving the maturity date of August sixteenth.

20. The days of the months are added together to verify they equal the ninety-day time period of the note.The days of the months are added together to verify they equal the ninety-day time period of the note.

21. Objective 4. Record Routine Notes Payable Transactions. The fourth objective of the chapter is to record routine notes payable transactions.The fourth objective of the chapter is to record routine notes payable transactions.

22. Notes Payable Transactions If four-thousand dollars worth of store equipment is purchased by issuing a note payable, the company would debit store equipment for four-thousand dollars and credit notes payable for the same.If four-thousand dollars worth of store equipment is purchased by issuing a note payable, the company would debit store equipment for four-thousand dollars and credit notes payable for the same.

23. Notes Payable Transactions When the notes matures, the company must pay the maturity value of the note. This includes a debit to notes payable of four-thousand dollars – the face value of the note. Interest expense is debited for eighty dollars and cash is credited for the total of four-thousand eighty dollars. Interest is calculated by multiplying the four-thousand dollar face amount of the note by eight percent interest, then multiplying that amount by ninety over three-hundred sixty days.When the notes matures, the company must pay the maturity value of the note. This includes a debit to notes payable of four-thousand dollars – the face value of the note. Interest expense is debited for eighty dollars and cash is credited for the total of four-thousand eighty dollars. Interest is calculated by multiplying the four-thousand dollar face amount of the note by eight percent interest, then multiplying that amount by ninety over three-hundred sixty days.

24. Objective 5. Record Discounted Notes Payable Transactions. The fifth objective of this chapter is to record discounted notes payable transactions.The fifth objective of this chapter is to record discounted notes payable transactions.

25. What is discounting? Discounting is deducting the interest from the principal of a note in advance.What is discounting? Discounting is deducting the interest from the principal of a note in advance.

26. Discounted Notes Payable In this example, a twelve-thousand dollar, seven percent interest, sixty day note is discounted with a bank. Notice how the calculated interest of one-hundred forty-dollars is deducted from the face amount of the note leaving net proceeds of eleven-thousand eight-hundred sixty dollars.In this example, a twelve-thousand dollar, seven percent interest, sixty day note is discounted with a bank. Notice how the calculated interest of one-hundred forty-dollars is deducted from the face amount of the note leaving net proceeds of eleven-thousand eight-hundred sixty dollars.

27. Recording a Discounted Note Payable When recording the discounted note payable, the interest expense is debited for the interest paid in advance.When recording the discounted note payable, the interest expense is debited for the interest paid in advance.

28. Recording the payment of a Discounted Note When the note matures, the notes payable account is debited for the face amount of the note, and a credit to cash is made for the same amount. No further interest expense is recorded at that time.When the note matures, the notes payable account is debited for the face amount of the note, and a credit to cash is made for the same amount. No further interest expense is recorded at that time.

29. On the balance sheet, notes payable are considered current liabilities is they are due within one year. Notes payable would be considered long-term liabilities if they were due in more than one year. On the income statement, interest expense is classified as a nonoperating expense and is listed in the other income and expenses section of the income statement.On the balance sheet, notes payable are considered current liabilities is they are due within one year. Notes payable would be considered long-term liabilities if they were due in more than one year. On the income statement, interest expense is classified as a nonoperating expense and is listed in the other income and expenses section of the income statement.

30. Let’s review.Let’s review.