Acquiring Notes Payable

Brian Krogol
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Alright so let's see some of the journal entries related to notes payable, how we acquire them, deal with the interest and finally pay them back. So I think it'd be really cool after you guys watch this lesson to go back and review the notes receivable lesson and you'll see how similar notes payable are. Two notes receivable. Right? Because when you think about it, one person's notes receivable is the other person's note payable. So some kind of old adage like that. So it's not in here to notes payable. So it's similar to a P. Right? Because it's a liability, it's money that we owe except it's supported by a formal written contract. Right? With a P. It might be just we got an invoice that we have to pay. Well here we've signed an actual note, write a note payable. We've signed a contract. That's the note. And the difference here with a P. Is that these notes? Well they're gonna have a maturity date. So there's gonna be a specific date in the contract, a maturity date and it has to be paid back and they earn interest. Okay so accounts payable. Think about it when we receive an invoice from a supplier it's not like they tell us we're gonna have to pay interest. No they just give us a few maybe a few weeks to pay and then we just pay it back. No interest included there. So the note payable interest is a big part of this. So we've got two terms here first we've got the principal right? The principle that's the actual amount of money borrowed um that that we actually borrowed. So the principal of the loan if we borrowed $100,000. Well the principle is $100,000 and then we pay interest on the borrowing, right? There's gonna be an interest rate and that's the cost of borrowing, right? That's why the bank will lend us money is because they're gonna earn interest. So we have a formula here uh for calculating interest and what we have is the face value of the note. So that's the principle right there, it's gonna be stated, this is gonna be given to you, we borrowed $100,000 whatever it might be, there's gonna be an interest rate and this interest rate is always gonna be an annual rate that they give you, even if it's a note that's five years long or six months long, nine months, they always tell you the full years interest. Even if you're not gonna pay that much or if you're gonna pay it for several years, you're gonna have an annual interest rate. And then we're gonna multiply it by a time factor. This time factor is usually a proportion of a year proportion of the year that we're calculating the interest, right? Because if let's say we took a loan out on september 1st and we're preparing december 31st financial statements, Well we only have, we don't have a full year there, right, we only want to calculate interest for that portion of the year. So we'll see some examples about that. But let's go ahead and start with acquiring the note. Let's see what the journal entry looks like when we acquire a note from the bank. So we actually sign sign a contract to borrow some money and we get the money on october 1st year one. The goods company signed a $100,000.12 percent eight month note payable. Maturing on May 1st year too. So there's a lot of information there. But that's all valuable here. They tell us the interest rate 12%. Right? And that's annual annual interest rate. They tell us the term. Right? This is the term of the loan. It's gonna be eight months total. Right. But it's not eight months this year. It's eight months between today, october 1st and May 1st when we're finally going to pay it back next year. So right here we have the maturity date, right? That's gonna be the maturity date May 1st. And what about the $100,000 over here? The $100,000. Well, that's the principle of the loan. Right? That's the principle, the face amount that we borrowed. So the journal entry when we first acquired the note payable? It's pretty easy. Right. What did we receive? We received cash from the bank. Right? They gave us cash and we signed this note. So we're gonna debit cash. And that's gonna be for the face amount. The 100,000. In principle that we took out 100,000. That is our debit. What's gonna be our credit? We've got this liability. We signed the note, we owe this money. It's a note payable. Right? So we're gonna credit notes payable And now we have this liability on our books for the 100,000 that we borrowed. Right? So now we got this cash, our cash went up by 100,000. And our liabilities for the note payable. Np. Np for note payable that also went up by 100,000. Right so we stay balanced here. Everything makes sense in there. Cool. So this is pretty simple um Pretty much a very simple journal entry. When we acquire a note payable it gets a little more interesting when we start dealing with the interest. So let's go ahead and do that in the next video.