Question

In QBO:

What are the steps to record borrowing on a note payable?

Answer 1

A note payable is a written promissory note. Under this agreement, a borrower obtains a specific amount of money from a lender and promises to pay it back with interest over a predetermined time period. The interest rate may be fixed over the life of the note, or vary in conjunction with the interest rate charged by the lender to its best customers (known as the prime rate). This differs from an account payable, where there is no promissory note, nor is there an interest rate to be paid (though a penalty may be assessed if payment is made after a designated due date).

A correct legal form would typically be far more expansive and cover numerous things like what happens in the event of default, who pays legal fees if there is a dispute, requirements of demand and notice, and so forth. In the preceding note, Oliva has agreed to pay to BancZone $10,000 plus interest of $400 on June 30, 20X8. The interest represents 8% of $10,000 for half of a year (January 1 through June 30).

The amount borrowed is recorded by debiting Cash and crediting Notes Payable:

Cash a/c Dr   10000

To Note Payable 10000

When the note is repaid, the difference between the carrying amount of the note and the cash necessary to repay that note is reported as interest expense. The journal entry follows:

Interest Exp a/c Dr     400

Note Payable a/c Dr   10000

           To Cash a/c            10400

Recording Notes Payable

According to the University of Massachusetts Lowell, notes payable are promises to pay a specific dollar amount on a specific date to the owner of the note. Notes payable are often used to buy merchandise or property and require payment of the principal and interest. Recording the purchase of office equipment through notes payable requires that the notes payable is placed as a credit and the office equipment as a debit. This is because assets increase with debits and debits equal credits. Related interest expense is recorded as a debit and interest payable as a credit. When the amount borrowed to make the purchase is repaid, the notes payable and interest payable are recorded as debits. This is because assets have decreased. The cash used to pay off the note is recorded as a credit because liabilities have decreased.