FDNACCT 05 · Promissory Notes

The party that issues the written promise to pay.

The maker undertakes the obligation to pay the specified amount on the due date. That promise is a liability in the maker’s records, unlike the payee’s right to collect.

The party entitled to receive payment.

The payee holds the right to collect from the maker, so the note is an asset in the payee’s records. The maker has the corresponding obligation to make payment.

Liability, normally credit. Current/non-current depends on due date.

An issued note obliges the maker to pay, which makes Notes payable a liability increased by credits. In the course classification, payment due within one year is current; payment due after more than one year is non-current.

Asset, normally debit. Current/non-current depends on due date.

The payee’s written right to collect is a resource, so Notes receivable is an asset increased by debits. Its due date determines current or non-current classification in the course, rather than the mere fact that a note is written.

I = Principal × Annual rate × Time in years.

Interest is the fee for using the principal for a stated time. Because the rate is annual, multiply it by the term expressed as a fraction of a year; using the raw number of days would greatly overstate interest.

Days / 360.

The course uses a 360-day denominator to express a day term as a fraction of the interest year. Thus 90 days gives 90/360 = 0.25 year; use this stated convention rather than substituting 365.

Months / 12.

An annual rate applies to twelve months, so divide the stated months by 12. Three months therefore represents 3/12 = 0.25 year, not three full years of interest.

Principal + Interest.

The principal repays the original amount promised, and interest compensates the payee for the use of that money. Their sum is the cash due at maturity; interest alone is only the additional charge.

Debit Cash; credit Notes payable.

Borrowing brings cash into the business and creates an obligation under the written note. Debit Cash to increase the asset and credit Notes payable to increase the liability; the borrowed principal is not revenue.

Debit Notes receivable; credit Accounts receivable.

The customer’s debt has not been collected or earned again; only its form changes from an ordinary account to a written note. Increase Notes receivable by debit and remove Accounts receivable by credit, without recording new revenue or cash.

Debit Notes payable and Interest expense; credit Cash for maturity value.

Payment extinguishes the principal liability and pays the cost of borrowing. Debit Notes payable for the face value and Interest expense for the full term interest, then credit Cash for their sum; interest is not part of the original Notes payable balance.

Debit Cash for maturity value; credit Notes receivable and Interest income.

Cash received contains both repayment of principal and interest earned over the term. Credit Notes receivable to remove the original asset and Interest income for the interest; treating all cash as income would overstate earnings by the principal.

Debit Accounts receivable for maturity value; credit Notes receivable for face value and Interest income for interest.

Dishonor means the maker did not pay, so no cash collection occurs. Under the course entry, the unpaid principal plus earned interest becomes an ordinary Accounts receivable; the credit to Notes receivable removes the note and the separate Interest income credit records the interest.

Debit Notes payable and Interest expense; credit Accounts payable for maturity value.

The obligation has not disappeared when the maker fails to pay. The course transfers principal plus interest to Accounts payable, debiting Notes payable to remove the note and Interest expense for the borrowing cost; no Cash credit is made because no payment occurred.

₱500: 50,000 × 0.04 × 90/360.

Interest = ₱50,000 × 0.04 × (90/360) = ₱50,000 × 0.04 × 0.25 = ₱500. The 4% rate is annual, so the 90-day term earns only one-quarter of a year’s interest; principal is repaid separately.

Clear the existing interest receivable/payable and recognize only additional interest for the later period.

Accrued interest has already been recognized as income or expense for the earlier period. At settlement, clear that receivable or payable and recognize only the later period’s interest, so the same full-term interest is not counted twice.

November 2, 2026

Exclude August 19: August 12 days + September 30 + October 31 + November 2 = 75.

No; count actual calendar days, but calculate course interest with days/360

The 360 denominator prices interest. It does not change August into a 30-day month.

₱2,400

I = 144,000 × 0.08 × 75/360 = 2,400; maturity value is 146,400.

₱144,000

Remove principal from Notes receivable; separately credit Interest income 2,400 and debit Cash 146,400.

₱85,050

Interest = 84,000 × .09 × 50/360 = 1,050; debt reclassified to AP = 84,000 + 1,050.

Service revenue

Direct acceptance for current services records Dr Notes receivable; Cr Service revenue. Conversion of an old account would credit AR instead.

Equipment

The debit reflects the acquired asset; the credit is Notes payable. A note does not always mean cash was borrowed.

₱4,800

Only Interest expense reduces profit/equity. Repaying principal reduces Cash and Notes payable equally.

₱4,800

Cash +100,800 minus Notes receivable 96,000 = net assets +4,800, equal to interest income.

Neither; the course reclassifies principal plus interest to an ordinary account

Maker: AP replaces Notes payable plus interest; payee: AR replaces Notes receivable plus interest. No cash changes hands.

September 15, 2026

Use six calendar months for a month-term note. Do not silently replace six months with a stated 180-day term.

₱3,000

4,800 − 1,800 = 3,000. Also clear Interest receivable 1,800; recognizing the whole 4,800 again would double-count prior income.