Notes Payable

>>Okay we’re going to look at notes payable. Note payable relates to when we borrow
money from a creditor; it could be a vendor, could be a bank, and so we have to recognize
a liability and you’ll notice the mechanics for notes payable are identical
to a note receivable. Both the note receivable and the
note payable can be current assets or liabilities, they could be non-current. They can have a portion of
current and non-current. We’re simply going to look at a
current liability, a nine-month note. And if you watch the note receivable
video you’ll notice the data is identical. On September 1, we borrowed $140,000 at 8
percent annual interest for a 9 month period. So on the day that we borrow the money we’re
going to debit cash for 140,000 and we’re going to credit notes payable for 140,000, okay. So our business year end, our fiscal year
end is December 31; it’s a calendar year end. And so you notice my time line here. We borrow the money on September 1, at December
31– September, October, November, December– four months have gone by and we have to accrue. We have to figure out how much interest we
have accrued, because we owe that money. If you think about it, if on January 1 we
paid back this loan early we’d still owe four months interest. And so accrual bases accounting,
the matching concept. We have to match expenses to the same time
period that they helped to create revenue, then we have to record four
months interest in the year 2015. So our interest calculation, the loan
principal 140,000 times an annual interest rate of 8 percent gives it $11,200
of annual interest. Let’s divide that by 12 months and
we get $933 of monthly interest. And by the way, we could have
divided this by 360 days, or 365 days to get daily interest,
but we used monthly interest. And then again in September, October, November,
December, 4 months interest have gone by, so 933 monthly interest times
4 months equals $3733. So my adjusting entry at the end of
the year to accrue the interest expense to make sure it hits this year’s income
statement would be to debit interest expense for 3733 and to credit interest payable 3733. Now I’m going to put T-accounts up
here for notes payable of 140,000, and for interest payable of 3733. Remember, interest expense is an
expense; it’s a temporary account. It gets closed out at the end of each year. So that gets set back to zero, but interest
payable is a liability just like notes payable, and it sits on our balance sheet. Now on June 1 the maturity date or the due date
is when we have to pay back all amount owed, the maturity value which is
principle plus nine months interest. So I have to pay back 140,000 loan
principle plus 9 months interest, okay. And so what I’m going to do is I’m
going to start with the credit. I’m going to credit cash for the nine months and
I have to find that dollar amount real quickly, and that amount is 148,398,
okay; that’s the loan principle of 140 plus 9 months interest,
what we call the maturity value. Now that we’ve paid back this note
payable I have to get it off my books, my accounting records, or else I’m going to
think that I still owe the money and I don’t. So I’m going to debit the note
payable and I will zero it out. So here’s my debit to notes payable 140. I’m going to do the same thing with
interest payable it’s just sitting there. I don’t owe that money anymore so I’m
going to debit interest payable for 3733 and in the following time period,
2016, Jan, Feb, March, April, May, five months have now gone by and I have to
accrue five months interest expense to record in the following year’s income statement,
933 monthly interest times 5 months is 4665. I’m going to debit interest expense for
4665 to recognize the 5 months of interest that occurred in the following time period. So even though we recorded a total of
9 months interest, 8398, 4 months of it or 3733 got recorded in 12/31/2015, and 5
months or 4665 got recorded in the year 2016, and that’s what accrual basis accounting
requires of us is to record revenues and expenses in the proper time period. Okay, and that’s notes payable.

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