How to Record a Payment to a Notes Payable

Journaling a balance sheet can be complex.

Financial accounting utilizes several tools to help prepare financial statements for company use. One important tool used in financial accounting is a balance sheet. A balance sheet is a running record of the company’s assets, liabilities and ownership equity. All of the money received by the company as well as payments paid by the company are recorded on the balance sheet. Journaling a balance sheet can be fairly complex due to the large number of transactions made by a company in a business year; however, taken one at a time, entries are as simple as understanding what accounts are affected by a transaction. For instance, a payment to a notes payable account will affect the cash, interest expense and notes payable account.

Things You'll Need

• Balance sheet

Instructions

1. Calculate the finance charges if your notes payable account accrues interest. The formula for simple interest is principle multiplied by interest rate multiplied by time borrowed. For instance, if you borrow $10,000 at 8 percent interest rate for one year, your interest expense will be $10,000 x .08 x 1, which equals $800.

2. Record the date of the payment in the date section of the balance sheet ledger. The date should indicate month, day and year.

3. Record the payment made towards the notes payable account in the first line. Since notes payable is a liability account, a decrease made to it is recorded as a debit. Write the payment made in the debit section of the balance sheet.

4. Record the payment made towards the interest expense account in the second line. Since interest expense is a liability account, a decrease made to it is recorded as a debit. Write the payment made toward interest in the debit section of the balance sheet.

5. Record the decrease in the cash account due to the payments made toward the notes payable and interest expense accounts in the third line. Since cash is an asset account, a decrease made to it is recorded as a credit. Write the total amount of the payment – notes payable plus interest expense – in the credit section of the balance sheet.

6. Record a summary of the payment in the fourth line, including the company the payment was made to, the date of the payment and the finance terms of the account. This does not affect an asset or liability account; therefore, do not write anything in the debit and credit section of the balance sheet.

References

• Cengage Learning: Notes Payable
• American Institute of Professional Bookkeepers: Accrued Expenses
• Principles of Accounting: Current Liabilities and Employer Obligations
• CliffsNotes: Understanding Notes Payable