How to Journalize Payments on a Note
A note payable is a liability that puts an obligation on the company’s resources. Notes payable may become due within one year, or the maturity date may be years away, depending on the loan terms. A company must record payments made on a note in the general journal. Making a payment on a note payable decreases the amount a company owes to a lender and decreases the company’s total liabilities. It also decreases an asset, because the company’s cash account will be reduced as a result of the transaction.
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Instructions
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Record the date of the transaction in the general journal. Write the day and month when the company made a payment on the note.
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Debit the notes payable account for the applicable amount. This reduces the company’s liabilities, since debiting a liability reduces the company’s obligation. The notes payable debit amount represents a payment toward the principal balance on the note. For instance, a company may have a $200,000 note payable due in five years. In this scenario, a company that decides to pay $50,000 on the note must debit notes payable for $50,000.
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Debit interest expense for the applicable amount. Most notes payable cause a company to pay interest on the loan. Let’s assume the company has a $200,000 note that has an 8 percent interest rate and the company must make interest payments every six months. Multiply the principal amount by the interest rate to determine the interest expense for the entire year. In this scenario, interest expense is $16,000 for the year. Divide the yearly interest expense by two to determine semiannual interest expense. In this instance, the semiannual interest expense is $8,000. Debit interest expense for $8,000 to illustrate the company’s semiannual expense of borrowing the $200,000.
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Credit cash for the amount paid on the note. Assuming a company paid $50,000 on the principal of the note and $8,000 in interest, the company must credit cash for $58,000. This transaction illustrates a $58,000 reduction in the company’s cash account.
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