Paying note at maturity
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The borrower pays off the note amount plus total interest accrued at maturity.
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 January 31st, 2023.
The blue underlined text signals...
- We borrowed this note on May 1st, 2022 and it was due in 9 months... and we're writing the journal entry for January 31st, 2023. ➡️ We're paying off the Notes Payable balance that we owe the bank from the note.
- In addition... ➡️ We're paying off the Interest Payable balance that we owe the bank from interest in 2022.
- We accrued interest in 2023 during January. ➡️ We'll account for one month of Interest Expense.
- To pay off this note plus interest, we'll be using cash. ➡️ We'll reference the Cash account.
The following journal entry was written on May 1st, 2022 (when we borrowed the note):
| Transaction | Debit | Credit |
|---|---|---|
| Cash | $1,000 | |
| Notes Payable | $1,000 |
We'll be paying off this Notes Payable balance of $1,000 in this journal entry.
| Transaction | Debit | Credit |
|---|---|---|
| Notes Payable | $1,000 | |
| ??? | ??? | |
| ??? | ??? | |
| ??? | ??? |
The reason is...
- We are paying off (-) the amount we owed to the local bank for the note.
- This amount was stored in Notes Payable.
- Which is a liability account, and therefore has a normal credit balance.
- So, to decrease it by $1,000, we'll debit it.
The following adjusting journal entry was written on December 31st, 2022 (to record 2022 interest accrued):
| Transaction | Debit | Credit |
|---|---|---|
| Interest Expense | $80 | |
| Interest Payable | $80 |
We'll be paying off this Interest Payable balance of $80 in this journal entry.
| Transaction | Debit | Credit |
|---|---|---|
| Notes Payable | $1,000 | |
| Interest Payable | $80 | |
| ??? | ??? | |
| ??? | ??? |
The reason is...
- We are paying off (-) the amount we owed to the local bank for the interest accrued over 2022.
- This amount was stored in Interest Payable.
- Which is a liability account, and therefore has a normal credit balance.
- So, to decrease it by $80, we'll debit it.
Note Amount = $1,000
Annual Interest Rate = 12%
Annual Interest = $1,000 x 12%
Annual Interest = $120
But we need monthly interest...
Monthly Interest = $120 / 12 months
Monthly Interest = $10
There's just 1 month from January 1st, 2023 (one day after the December 31st, 2022 adjusting entry for interest) and January 31st, 2023.
2023 Interest = $10 x 1 month
2023 Interest = $10
| Transaction | Debit | Credit |
|---|---|---|
| Notes Payable | $1,000 | |
| Interest Payable | $80 | |
| Interest Expense | $10 | |
| ??? | ??? |
The reason is...
- We have incurred an expense (+) in the form of interest over the course of 2023 for one month.
- This is represented through Interest Expense.
- Which is an expense account, and therefore has a normal debit balance.
- So, to increase it by $10, we'll debit it.
| Transaction | Debit | Credit |
|---|---|---|
| Notes Payable | $1,000 | |
| Interest Payable | $80 | |
| Interest Expense | $10 | |
| Cash | $1,090 |
The reason is...
- We are spending (-) cash to pay the local bank back for the note ($1,000), interest from 2022 ($80), and interest from 2023 ($10). This sums to
$1,000 + $80 + $10 = $1,090. - This payment is represented through Cash.
- Which is an asset account, and therefore has a normal debit balance.
- So, to decrease it by $1,090, we'll credit it.