Fundamentals of ABM2 The Notes Payable.pptx

Notes payable are written agreements between a borrower and a lender, wherein the borrower promises to pay a specific amount of money at a future date. These obligations typically arise from borrowing funds or purchasing goods on credit. Notes payable often include interest terms, repayment schedules, and can vary in duration from short-term (less than one year) to long-term (over one year). They are classified as liabilities on a company's balance sheet and play a crucial role in managing cash flow and financing operations. Properly managing notes payable is essential for maintaining financial health and creditworthiness.

1. Notes Payable Presentation Mr. Niejay A. Llagas Fundamentals of ABM 1

2. Differentiate between short-term and long-term notes payable. Record journal entries for the issuance and repayment of notes payable. Calculate interest expense and maturity value of notes payable. Define notes payable and explain their purpose. Objective Understand the impact of notes payable on financial statements. Notes Payable Fundamentals of ABM 1

3. Notes Payable Fundamentals of ABM 1 Have you ever borrowed money? How did you record it, and how did you plan to pay it back?

4. 01. Introduction Elaborate on what you want to discuss. Notes Payable Fundamentals of ABM 1 Introduction A note payable is a written promise made by a company to pay a certain amount of money at a future date. It is a type of debt and is recorded as a liability on the company's balance sheet. Notes payable can be short-term or long-term, depending on the maturity date. They typically involve interest payments, which are specified in the terms of the note. Notes payable are often used to obtain financing or to settle accounts payable over a longer period.

5. Notes Payable Fundamentals of ABM 1 Types of Notes Payable These are obligations that are due within one year. Companies use them for short-term financing needs or to settle accounts payable. Short – Term Notes Payable Long –Term Notes payable Secured notes Payable Unsecured Notes Payable These are obligations that extend beyond one year. They are often used for major capital expenditures or long-term projects. These notes are backed by collateral, such as property or equipment, which the lender can claim if the borrower defaults. These notes are not backed by collateral and rely solely on the borrower's creditworthiness.

6. Notes Payable Fundamentals of ABM 1 Types of Notes Payable These can be converted into a specified number of shares of the issuing company's stock, usually at the discretion of the noteholder. Convertible Notes Payable Demand Notes Payable Installment Notes Payable These notes must be repaid upon the lender's request or "demand." These involve regular periodic payments, including both principal and interest, over the life of the note.

7. Notes Payable Fundamentals of ABM 1 Interest on Notes Interest - This is the percentage charged on the principal amount borrowed. The rate can be fixed or variable. P - Principal R – Rate of Interest T - Time ( P x R x T ) Interest Calculation - Interest can be paid periodically (e.g., monthly, quarterly) or at maturity along with the principal. Interest can be calculated using different methods, but the most common is the simple interest formula: PRT Payment Schedule

8. Notes Payable Fundamentals of ABM 1 Maturity on Notes Short-term vs. Long-term The date on which the principal amount of the note is due to be paid back to the lender. Notes payable can be classified as short-term (due within one year) or long-term (due after one year). Maturity Date Amortization For long-term notes, payments may include both interest and principal, reducing the outstanding balance over time (amortizing loan).

9. Notes Payable Fundamentals of ABM 1 Accounting to Notes Payable Company X Delivery Truck worth PHP 1,000,000 PHP 1,000,000 amount borrowed money from the bank Signs a contract or promissory note (An illustrative example) Principal – 1,000,000 Maturity Date – 2 years Rate of th e Interest – 12 % Timin g of Payments – Annual payment

10. Notes Payable Fundamentals of ABM 1 Key Details that makes up the Note Payable ASSETS LIABILITIES 1,000,000.00 1,000,000.00 Loan is signed Funds received Accounting transactio n has occurred

11. Notes Payable Fundamentals of ABM 1 Common Mistakes Accounts payable is not the same as notes payable Accounts payable - Short – term obligations - Less formal - Don’t include interest

12. Notes Payable Fundamentals of ABM 1 Accounting Considerations P rincipal Amount 1,000,000.00 R ate of Interest 12% or 0.12 T ime Frame 2 years Jan 1 YEAR 1 Notes Payable Dec 3 1 PRINCIPAL RATE OF INTEREST TIME 1,000,000 0.12 1 1,000,000 x 0.12 x 1 = 120, 000.00 Annual interest payment of 120,000 pesos *Debit (Interest Expense) *Credit (cash) Debit Credit 120,000.00 120,000.00

13. Notes Payable Fundamentals of ABM 1 At the end of year 2, the company needs to clear out the notes payable balance by 1,000,000.00 YEAR 2 Notes Payable Jan1 Dec 3 1 Debit Rate (Interest Expense) 120,000 Debit Rate (Notes Payable) 1,000,000 Credit Rate 1,120,000 Debit Credit 1,120,000.00 1,120,000.00

14. Notes Payable Fundamentals of ABM 1 Notes payable are the extremely common category of liabilities for most companies Notes payable allow organizations to access the capita l they need to make investments. Lastly;

15. Notes Payable Fundamentals of ABM 1 Interactive Activity Group Exercise: - Calculate interest, maturity value, and prepare journal entries. Situation: XYZ Corporation took out a loan on January 1, 2024. The company signed a 12-month note payable for PHP50,000 with an annual interest rate of 6%. The note is due on December 31, 2024, with interest payable annually. Requirements: Journal Entry on January 1, 2024: Record the initial loan transaction. Interest Calculation: Calculate the total interest expense for the year. Journal Entry for Interest Expense on December 31, 2024: Record the interest expense at the end of the year. Journal Entry for Note Payable on December 31, 2024: Record the payment of the note payable and interest.

16. Notes Payable Fundamentals of ABM 1 Assignment Via forms: Link will be sent thru LMS