Question

When an ordinary note is paid, what effect does it have the accounts and financial statements?

Answer 1

When ordinary notes ( notes payable)is paid following journal entry is passed

Notes Payable Account debit

To Cash Account credit

Notes Payable is paid it means reducation in the value of liabilities that is why it will be debited

Secondly cash is being paid so reduction in asset that is why it will be credited.

Effects on financial statement

In balance sheet , the value of Notes Payable will be reduced under current liabilities. While under current asset the value of cash will be reduced.

If Notes are payable with interest then following journal entry will be passed

Notes Payable

Interest expense

To cash

It is important to understand over here that interest is the expense as it is increasing that is why it will debited.

Interest will be shown in Statement of Profit and loss as expense

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