College Accounting (Chapter#16- Notes Payable & Notes Receivable)
Time Draft
A Commercial Draft that is payable during a period of time, either specified by date or number of days due after the acceptance of the draft.
Sight Draft
A Commercial Draft that is payable upon presentation. When this draft is issued, no journal entry is made, but the draft is honored, the transaction is recorded as a Cash Receipt. These drafts are used to collect past-due Accounts Receivable, and to obtain cash on delivery when shipments are made to customers with poor credit/new customers with no established credit.
Bill of Lading
A business document that lists the goods accepted for transportation by a carrier, then is sent to a bank near the customer, where the customer then pays the draft in order to obtain the document. The customer cant receive the goods until obtaining this document.
Bank Draft
A check written by a bank that orders another bank to pay the stated amount to a specific party. This is used to pay debts to suppliers with whom credit has not been established. This Draft is more readily accepted than a personal or business check.
Cashier's Check
A draft on the issuing banks own funds, which for a creditor, offers more protection than a business or personal check.
Negotiable Instrument
A financial document containing a promise or order to pay, that meets all the requirements of the UCC in order to be transferable to another party.
Trade Acceptance
A form of Commercial Time Draft used in transactions involving the sale of goods. The original transaction is recorded as a credit, but when the draft is accepted, it is accounted for as a Promissory Receivable.
Note Payable
A liability that represents a written promise by the maker of the note (the debtor) to pay another party (the creditor) a specified amount at a specified future date. There is a Sub-Account under the Liabilities Account used to record/track these transaction agreements.
Commercial Draft
A note issued by one party that orders another party to pay a specified amount on a specified date. These drafts are either sight drafts or time drafts, used for special shipment/collection situations.
Promissory Note
A written and signed document, used as a negotiable instrument when making a purchase, stating the date issued, payee, maker/purchaser, face-value amount, terms, and interest rate. This is serves as an agreement between purchaser and payee, where the amount is paid by the Maturity Date, rather than paying up-front.
Draft
A written order that requires one party (a person or business) to pay a stated sum of money to another party.
Note Receivable
An Asset Account that represents a creditor's written promise to pay a specified amount at a specified future date.
Recording Notes Receivable Process
Debit to the Notes Receivable Account in the amount of product/service charged to a customer. Credit that amount to the Accounts Receivable/'Customer Name".
Discounting
Deducting the interest from the principal on a note payable or receivable in advance.
Contingent Liability
Discounted notes can become a liability if certain things happen. These liabilities are shown on the Financial Statements so that the users are aware that the business might have a liability in the future.
Recording Interest Bearing Notes Receivable Processes
First line, debit to Cash Account for the total amount of product/service cost plus Interest. Second line, credit to Notes Receivable Account for the product/service cost. Third line, credit to Interest Income Account for the total interest charge.
Recording Payment of a Note and Interest
On the Maturity Date, the payment for the product/service cost, plus interest, is remitted to the creditor. First line debits the Notes Payable-Trade Account by the Cost total. Second Line debits the Interest Expense Account by the Interest amount being charged. Third line credits the Cash Account by the total remittance amount due (product/service cost + plus interest).
What does it mean to Dishonor a Note?
The Maker of the Note does not pay it when it's due.
Principal/Face Value
The amount shown on the face of a Promissory Note, stating the amount being borrowed.
Recording Issuance of a Note Payable
The appropriate Expense Account (ex: supply, equipment, consultant services, marketing, etc.), is debited by the cost of the product/service purchased and credited to the Issued Notes Payble-Trade Account by that same amount. The entry must be the same as the Issue Date.
Negotiable Instrument UCC Requirements
The document must me in writing, signed by both parties. Contains an unconditional promise or order to pay a definite amount of money. Is payable either on demand or at a future date that is fixed and payable to the order of a specific person.
Maturity Date
The due date stated on a Promissory Note.
How much cash will the borrower receive for a $12,000, 75-day, non-interest bearing Note Discounted as 8%?
The proceeds would come out to $11,800. (Discount: $12,000 x .08 x 75/360= $200 Proceeds: $12,000 - $200 = $11,800)
What is the interest due on a Note for $12,000 at 8% for 75-days?
The total Interest due would be $200. ($12,000 x .08 x 75/360 = $200)
Maturity Value
The total amount of Principal plus Interest that must be paid when the Promissory Note is due.
UCC
Uniform Commercial Code
What would the Maturity Date be on a 120-day Note issued on April.10th?
Aug.8th (4-months post-date of Promissory Note Date)
A Note Receivable with a Maturity value of $6,200 is discounted at 10% with 90-days remaining until the Maturity Date. What are the proceeds from discounting the Note?
Calculated total comes out to $6,045. (Discount: $6200 x .10 x 90/360 = $155 Proceeds: $6200 - $155 = $6045)
Why do businesses sometimes accept Notes Receivable from customers?
If a customer is unable to pay a currently due Accounts Receivable, it is wise to have a Note Receivable signed. The Note Receivable provides greater legal protection to it's holder than does an Account Receivable claim.
Interest Calculation Formula
Interest = Principal x Rate x Time