Chapter 16: Notes Payable and Notes Receivable

Promissory Note Checklist

1. Principal or face value amount 2. Payee 3. Interest rate 4. Term of Note (time to pay) 5. Issue Date 6. Maturity Date 7. Maker

UCC specifications of what classifies an instrument as negotiable.

1. be in writing and signed by maker or drawer. 2. contain an unconditional promise or order to pay a definite amount of money. 3. be payable either on demand or at a later time that is fixed or can be determined 4. be payable to the order of a specified person or bearer. 5. clearly name/identify the drawee if addressed to a drawee.

Banker's Year

360 days Used to calculate interest on a note

trade acceptance

A form signed by a buyer at the time of a sale of merchandise in which the buyer promises to pay the seller a specified sum of money, usually at a stated time in the future.

commercial draft

A note issued by one party that orders another party to pay a specified sum on a specified date. Usually used in special shipment and collection situations.

negotiable instruments

A written promise or order to pay a specific sum of money that may be transferred by endorsement or delivery. The transferee then has the original payee's right to payment. ex. checks, promissory notes, etc.

Principal value

Also known as face value or face amount. Shows the value of the money being lent

Note receivable

An asset representing a written promise by another party (the debtor) to pay the note holder (the creditor a specified amount at a specified future date.

Notes for notes payable

Notes due within a year are considered current liabilities. Any longer than a year are considered long-term liabilities.

maturity date

The date on which an investment becomes due for payment.

contra asset account

an account that is offset against an asset account on the balance sheet

Contingent Liability

an existing uncertain situation that might result in a loss

Bill of lading

business document that lists the goods accepted for transportation by a carrier.

time draft

commercial draft that is payable during a specified period of time.

discounting

deducting the interest on a loan in advance

Interest

fee charged for the use of money.

maturity value

the total amount (principal + interest)

Cashier's Check

a check written by a bank on its own funds.

Bank draft

a check written by a bank that orders another bank to pay the stated amount to a specific party.

sight draft

a commercial draft that is payable on presentation. Used to collect past-due accounts receivable. Also used to obtain cash on delivery when shipments are made to customers with poor credit.

notes payable register

a detailed auxiliary record of notes payable. It contains: 1. issue date 2. the payee 3. where the note is payable 4. the term of the note 5. the maturity date 6. the face amount 7. the interest rate (if applicable) 8.the interest amount (if applicable)

dishonored note

a note that is not paid when due. DO NOT RECORD IN NOTES RECEIVABLE ACCOUNT. Balance to Accounts Receivable instead.

promissory note

a written contract with a promise to pay a supplier a specific sum of money at a definite time. Can be classified as a notes receivable or payable. Also provides more legal protection than an account payable

draft

a written order that requires one party (a person or business) to pay a stated sum of money to another party. Ex. check, bank draft, and commercial drafts.

Internal Controls for Notes Payable/Receivable and Drafts

1. Limited by the number of people who can sign the note for the firm 2. Record all notes payable immediately. 3. Assign/Identify the responsible party for prompt payment of interest and principal for notes payable. 4. When paid, mark as note payable with "canceled" or "paid" and file note 5. Handle drafts like checks 6. Authorize certain people to accept notes. 7. Record all notes receivable in the accounting records 8. Store notes receivable securely. 9. Notify the issuer of the approaching maturity date. 10. No payment? Contact the issuer. 11. Past-due payments? take necessary steps like legal action to get the monies.

Steps to determine the discount and the proceeds on notes receivable

1. Determine the maturity value of the note. 2. Calculate the number of days in the discount period 3. Compute the discount charged by the bank. 4. Calculate the proceeds. Note: Discount is always debited to Interest Expense. Credit is to Notes Receivable - Discounted

Interest rate formula

Interest = Principal x Rate x Time