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The note is borrowed when the borrower creates the note with the lender and receives cash equaling the note amount.
Scenario: On May 1st, 2022, you borrow a $1,000, 12% annual interest note due in 9 months from your local bank. Write the journal entry for May 1st, 2022.
The blue underlined text signals...
- We're writing the journal entry for May 1st, 2022, and the note was issued to us on May 1st, 2022 ➡️ We're collecting Cash on this date.
- In turn for collecting cash from the note... ➡️ We will owe it back to the bank as Notes Payable.
The reason is...
- We have obtained (+) cash from the local bank right now in the process of this note being issued to us.
- This is represented through Cash.
- Which is an asset account, and therefore has a normal debit balance.
- So, to increase it by $1,000, we'll debit it.
The reason is...
- We now owe (+) the local bank for this note once it matures, and are liable to pay it back.
- This is represented through Notes Payable.
- Which is a liability account, and therefore has a normal credit balance.
- So, to increase it by $1,000, we'll credit it.
