Notes Payable – Crammer Nation

Notes Payables operate almost very similar to Notes Receivables (covered in Exam 2), with a critical difference:

Notes Receivable = Point of view of borrower
Notes Payable = Point of view of lender

To understand how they work, we're going to run through the same exact scenario in Notes Receivable...

Question: On May 1st, 2022, Hats LLC provided a mass order for their favorite customer, Samantha. To pay off the mass order, they both agree upon a $1,000, 12% annual interest note due in 9 months.

What journal entry should Hats LLC make on...

...except from the lens of Samantha, the lender, this time!

If we were asked to record the creation of the note, we'd be asked for the journal entry on May 1st, 2022.

This journal entry is pretty simple: Samantha is creating a liability for herself (specifically from the Notes Payable account) by creating the note with Hats LLC here.

Therefore, we need to add $1,000 to our Notes Payable account.

How will we add $1,000 to Notes Payable? We’ll credit it, since it's a liability and therefore has a normal credit balance!

Transaction	Debit	Credit
???	???
Notes Payable		$1,000

Next, what will we debit?

Well, by Samantha taking out a note, she is gaining cash in the present moment. Therefore, she's increasing her Cash account balance, which means we'll debit Cash (since it's an asset with a normal debit balance)!

Transaction	Debit	Credit
Cash	$1,000
Notes Payable		$1,000

The journal entry recording the creation of the note on May 1st, 2022 would look like this:

Transaction	Debit	Credit
Cash	$1,000
Notes Payable		$1,000

PAID CONTENT

This is the end of the preview. To unlock the rest, get the Lifetime Access, ACC 221 Final Exam Cram Kit or ACC 221 Cram Kit Bundle.

Already purchased? Click here to log in.

Leave a Comment Cancel reply

Reach out to us!