Accounting 3

1. Accounting 3 Chapter 23 Section 2

2. Signing a Note Payable • Current Liabilities – Liabilities due within a short time, usually within a year. • Notes Payable are usually paid within one year so they are classified as Current Liabilities. • When a business signs a note payable, the principal of the note is credited to a liability account titled Notes Payable. • The principal amount is also debited to cash because the business receives that cash from the lender.

3. Cash Receipts Journal Page ___ Doc No. Post Ref. GENERAL Sales Tax Payable Date Account Title Accts Rec. Credit Sales Credit Sales Dis. Debit Cash Debit DEBIT CREDIT Debit Credit Journal Entry for signing of a Note Payable 8 Mr 13 Notes Payable R302 5000.00 5000.00 March 13. Signed a 90-day, 10% note, $5000.00. Receipt No. 302.

4. Paying Principal and Interest on a Note Payable • When a note payable reaches its maturity date, the maker of the note pays the maturity value (which includes the principal plus interest) to the payee. • The interest accrued on money borrowed is called interest expense and is debited to an account with the same name. • Interest expense has a normal debit balance. However, it is a financial expense rather than a normal operations expense. Therefore it is listed in a classification titled Other Expenses in a chart of accounts.

5. Cash Payments Journal Page ___ Ck No. Post Ref. GENERAL Date Account Title Accts Pay Debit Purch. Disc. Credit Cash Credit DEBIT CREDIT June 11. Paid cash for the maturity value of the March 13 note: principal, $5000.00, plus interest, $125.00; total, $5,125.00. Check No. 627. Jn 11 Notes Payable 627 5 0 0 0 00 5 1 2 5 00 Interest Expense 1 2 5 00

6. Signing a Note Payable for an Extension of Time. • A business may ask for an extension of time if it is unable to pay an account when due. The vendor may ask the business to sign a note payable. • The note payable does not pay the amount owed to the vendor. • The form of liability is changed from an account payable to a note payable.

7. Signing a Note Payable for an Extension of Time. • When the entry is posted, the balance of the Accounts Payable account will be zero and the Notes Payable will contain the amount due to the vendor. • How to journalize on next slide.

8. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit April 5. Winning Edge signed a 60-day, 18% note to Pollard Supply for an extension of time on its account payable, $3000.00. Memorandum No. 47. 4 Apr 5 Accts Pay/ Pollard Supply M47 3 0 0 0 00 Notes Payable 3 0 0 0 00

9. Paying a Note Payable Issued for an Extension of Time. • The entry to record the cash payment at the maturity date of a note payable is the same regardless of the reason the note was signed. • So basically journal the same way you do when you pay off any note.

10. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit Work Together p. 602.General Journal, this slide; Cash Receipts, next slide; Cash Payments, third slide. 3 Mar 18 Accts Pay/ DryCreek Co. M288 2 0 0 0 00 Notes Payable 2 0 0 0 00 Assignment

11. Cash Receipts Journal Page ___ Doc No. Post Ref. GENERAL Sales Tax Payable Date Account Title Accts Rec. Credit Sales Credit Sales Dis. Debit Cash Debit DEBIT CREDIT Debit Credit 5 MR 3 Notes Payable 279 6000.00 6000.00 Back to General Journal Forward to Cash Payments Journal

12. Cash Payments Journal Page ___ Ck No. Post Ref. GENERAL Date Account Title Accts Pay Debit Purch. Disc. Credit Cash Credit DEBIT CREDIT 9 May 17 Notes Payable 255 2 0 0 0 00 2 0 6 0 00 Interest Expense 6 0 00 Jun 1 Notes Payable 263 6 0 0 0 00 6 1 8 0 00 Interest Expense 1 8 0 00 Back to General Journal Back to Cash Receipts Journal

13. Assignment • Do Application 23-2 by hand. • Turn it into Mrs. Middleton. • Move on to Section 23-3.