Interest Bearing Note Payable Journal Entry

An interest-bearing note represents funds loaned by a lender to a borrower. The amount of the loan is presented on the face of the note. The borrower promises to return an amount that includes both principal and interest.

Bearing notes can be found in the financial instrument known as “notes”. They are issued when an issuer borrows money from an investor. The terms of the note will include specific details about repayment, due date, and the agreed interest rate.

According to the borrower and lender agreement, repayment of the loan is required with interest and can be repaid either before or after the due date. If you fail to repay your loan on time, you’ll be responsible for paying the additional interest or penalty.

The issuer is obligated to pay an amount of money, denominated in a currency specified on the note, on a specific date (the maturity date) or at some later time (the grace period). The day and manner of repayment can vary depending on local laws and the agreement.

Journal Entry for Interest Bearing Note Payable

Note payable is classified as the liability on the balance sheet. Most of them are considered noncurrent liability due to their long-term life.

The company will receive cash when issuing notes payable to the investors or creditors. At the same time, they have to record the note payable on the balance sheet which represents the company’s obligation to pay back the principal and interest.

The journal entry is debiting cash and credit notes payable.

The cash receives presents the amount that company borrows from the investor and it will increase on balance sheet. The note payable present the company obligation to pay back to investors, it is the noncurrent liability on the balance sheet.

At the end of the month, the company to account for the interest expense which equals the principle multiplied by the interest rate.

The journal entry is debiting interest expense and credit interest payable.

The transaction will record the interest expense on the income statement. However, it is not yet the payment date, so the company has to record the interest payable which is the liability on balance sheet.

On the payment date, company paid cash to the investor to settle the interest payable. They will record cash out and reverse the interest payable.

The journal entry is debiting interest payable and credit cash.

Example

Company ABC has issued a note payable of $ 100,000 with an interest rate of 8% to the investor. The note payable was issued on 01 March and the interest is paid on the 5th of each month. Please prepare the journal entry for the interest-bearing note payable.

This note payable is considered an interest-bearing note payable as it has interest attached. It will be classified as the note payable which is the noncurrent liability on the balance sheet.

When issuing the note payable, company record journal entry by debiting cash and credit note payable.

At the end of the month, the company has to record interest expenses and interest payable.

Interest expense = $ 100,000 x 8% = $ 8,000

The journal entry is debiting interest expense $ 8,000 and credit interest payable $ 8,000.

The entry will record the interest expense on the income statement. Another side of the transaction will impact the interest payable as the company has not yet made payment at the month-end.

On 5th of next month, company has to pay interest to the investor.

The journal entry is debiting interest payable $ 8,000 and credit cash $ 8,000.

ABC will remove interest payable from balance sheet and decrease cash balance.