ACCOUNTING FOR

PROMISSORY
NOTES

 A negotiable instrument
An unconditional promise to pay a sum certain in
money at a determinable future time, made by a
maker, to a payee.
May either be:
Interest-bearing
Non-Interest bearing

PROMISSORY NOTE

Manila, Philippines
P150,000.00
July 1, 20x3
PROMISSORY NOTE
FOR VALUE RECEIVED, I promise to pay Allen Molina the
amount of One Hundred Fifty Thousand Pesos (P150,000.00) on
August 30, 20x3 plus interest at the annual rate of 12%
(Signed) Hannah Marie Sy

PROMISSORY NOTE

 MAKER
The party who made the promissory note and
eventually signs on it
The party who makes a promise to pay the agreed
amount at a specified future date
The debtor in the transaction

COMPONENTS OF A
PROMISSORY NOTE

 PAYEE
The person or business to whom the promise of future
payment was made.
The recipient of the promissory note
The creditor in the transaction

COMPONENTS OF A
PROMISSORY NOTE

 PRINCIPAL AMOUNT/ PRINCIPAL

The amount loaned or borrowed by the maker of the
promissory note

COMPONENTS OF A
PROMISSORY NOTE

 INTEREST
The opportunity cost involved in the lending
transaction
Represents a revenue on the part of the payee, for
money lent
Represents a cost or expense on the part of the maker
for money borrowed.

COMPONENTS OF A
PROMISSORY NOTE

 INTEREST PERIOD
The period of time during which the interest on the
note is to be computed
Extends from the date of the note until the maturity
date

COMPONENTS OF A
PROMISSORY NOTE

 INTEREST RATE
The percentage rate multiplied to the principal and the
term of the note in order to arrive at the interest earned
or incurred for the period.

COMPONENTS OF A
PROMISSORY NOTE

 MATURITY DATE
The date on which final payment on the promissory
note is due.

COMPONENTS OF A
PROMISSORY NOTE

 MATURITY VALUE
The sum of the PRINCIPAL and INTEREST due at
the maturity date of the promissory note
The amount that the payee expects to receive, and the
maker expects to pay

COMPONENTS OF A
PROMISSORY NOTE

 PLACE OF ISSUE
The location, specifically the city or town in which the
maker issued the promissory note

COMPONENTS OF A
PROMISSORY NOTE

 The entity renders services or sells goods to a client, in

return the client issued a promissory note in settlement of
the account.
The client has an outstanding account that is going to be
due, however, he does not have sufficient cash to pay. In
return, he offers to issue a promissory note
A loan is extended to a borrower who issues a promissory
note

SOURCES OF A PROMISSORY
NOTE

PROMISSORY NOTE ARISING FROM SERVICES

RENDERED TO CLIENTS
Notes Receivable
XXXXXX
Service Income
XXXXX
To record the receipt of promissory
note for services rendered.

ILLUSTRATION

PROMISSORY NOTE ISSUED BY A CLIENT TO

EXTEND HIS ACCOUNT
Notes Receivable
XXXXXX
Accounts Receivable
XXXXX
To record the receipt of promissory
note as settlement of a previous account.

ILLUSTRATION

PROMISSORY NOTE RECEIVED IN

CONSIDERATION OF A LOAN GRANTED
Notes Receivable
XXXXXX
Cash
XXXXX
To record the receipt of promissory
note for money lent.

ILLUSTRATION

 A promissory note may either be

Interest-Bearing- a promissory note which provides for the
separate payment of interest together with the principal at
maturity date.
Non-Interest Bearing- a promissory note that does not
require a separate payment for interest at maturity date

INTEREST- represents an opportunity cost

INTEREST ON PROMISSORY
NOTES

 SIMPLE INTEREST COMPUTATION FORMULA:

I = PRT
Interest = Principal X Rate X Time

INTEREST ON PROMISSORY
NOTES

 The PRINCIPAL AMOUNT is the amount stated on the

face of the promissory note
The rate, if silent, is assumed to be ANNUAL.
The most critical factor in interest computation,
COMPUTING FOR THE TIME/ PERIOD IN
WHICH INTEREST WAS EARNED

INTEREST COMPUTATION
ON PROMISSORY NOTES

 HOW TO PROPERLY COUNT THE DAYS

EARNED IN A PROMISSORY NOTE?
Let us use the earlier example, in which the promissory
note was issued July 1, 20x3 and due August 30, 20x3
Number of Days in July
31
Date of the Note
Number of remaining days in July
Number of Days needed in August
Total Number of Days from July 1

INTEREST COMPUTATION
ON PROMISSORY NOTES

(1)
30
30
60

 HOW TO PROPERLY COUNT THE DAYS EARNED IN

A PROMISSORY NOTE?
Assume a promissory note was issued September 15, 20x3
and due December 31, 20x3
Number of Days in Sept
Date of the Note
Number of remaining days in Sept
Number of Days needed in October
Number of Days needed in Nov
Number of Days needed in Dec
Total Number of Days from Sept 1

30
(15)
15

31
30
31
107

INTEREST COMPUTATION
ON PROMISSORY NOTES

 Continuing the earlier illustration on which a

promissory note with P150,000 principal was received
and an interest of 12% annually was stipulated:

Interest = Principal X Rate X Time

= P150,000 X 0.12 X 60/360
INTEREST = P3,000

INTEREST COMPUTATION
ON PROMISSORY NOTES

 Continuing the earlier illustration on which a

promissory note with P150,000 principal was received
and an interest of 12% annually was stipulated:
Principal
Interest
Maturity Value

P150,000
3,000
P153,000

INTEREST COMPUTATION
ON PROMISSORY NOTES

 The entry to record the collection of the promissory

note at maturity date:
Cash
Notes Receivable
Interest Income
To record the collection of the note at
maturity date

153,000
150,000
3,000

INTEREST COMPUTATION
ON PROMISSORY NOTES

DISCOUNTING
CUSTOMERS NOTE

 Endorsing or selling the promissory note before its

maturity date
The purpose is to generate quick cash to finance some
needs of the entity
When payee discounts a promissory note, the payee
receives lesser proceeds compared to that of the
maturity value

DISCOUNTING NOTES
RECEIVABLE

 When the payee endorses or discounts the promissory

note to a bank prior to maturity, the bank advances to
the payee a sum of money computed at the date of
discounting and at the discount rate of the bank
May either be:
With recourse
Without recourse

DISCOUNTING NOTES
RECEIVABLE

 The bank holds a recourse or a right against the seller

of the note or the payee
In effect, the seller of the note guarantees that at
maturity date, the maker will pay the sum to the
bank, thus a need to recognize a contingent liability
exists.
There are two possibilities when a customers note
has been discounted with recourse
Maker honors the note
Maker dishonors the note

DISCOUNTING CUSTOMERS
NOTE WITH RECOURSE

Example:
Maria De Leon received a 60-day 12% P15,000
promissory note from Alvin Ban on July 1, 2013. On
August 4, 2013 Maria De Leon endorses the note to BPI
for discounting.

Two possible scenarios at MATURITY DATE:

Alvin Ban honors the promissory note
Alvin Ban dishonors the promissory note

DISCOUNTING CUSTOMERS
NOTE WITH RECOURSE

The main issue in discounting a customers note would be

the COMPUTATION OF PROCEEDS TO BE
RECEIVED at the date of discounting.
In computing the proceeds, THREE DATES must be
remembered:
1. Date of the note
2. Date of discounting
3. Maturity date of the note

DISCOUNTING CUSTOMERS
NOTE WITH RECOURSE

 Illustration:
On July 1 2013, Allen Molina received a 60-day 12%
P150,000 promissory note from Hannah Marie Sy. On
July 27, 2013 Allen discounted the promissory note with
PNB. At that time the discount rate was 14%

ILLUSTRATION: DISCOUNTING
OF CUSTOMERS NOTE

 1. Determine the MATURITY VALUE of the note

Principal
Interest
Maturity Value

P XXXXX
XXXXX
P XXXXX

Applying the illustration:

Principal
Interest(150,000*0.12*60/360)
Maturity Value

P 150,000
3,000
P153,000

ILLUSTRATION: DISCOUNTING
OF CUSTOMERS NOTE

 2. Determine the DISCOUNT PERIOD

No. of Days in July
Date of Discounting
No. of Days remaining in July
Days in August before Maturity
DISCOUNT PERIOD

31
(27)
4
30
34

ILLUSTRATION: DISCOUNTING
OF CUSTOMERS NOTE

60 DAYS

Date of
Note:
July 1,
20x3

26
Days

Date of
Discounting:
July 27,
20x3

34
Days

Maturity
Date:
August
30, 20x3

DISCOUNT PERIOD

ILLUSTRATION: DISCOUNTING
OF CUSTOMERS NOTE

3. Compute for the DISCOUNT.

DISCOUNT FORMULA:
DISCOUNT = MATURITY VALUE X DISCOUNT RATE X
DISCOUNT PERIOD

ILLUSTRATION: DISCOUNTING
OF CUSTOMERS NOTE

Applying the illustration:

Maturity Value: P153,000
Discount Rate: 14%
Discount Period: 34 Days
DISCOUNT:
= P153,000

X 0.14 x 34/360

= P2,023

ILLUSTRATION: DISCOUNTING
OF CUSTOMERS NOTE

 4. Determine the NET PROCEEDS FROM

DISCOUNTING
Formula:
Maturity Value
Discount
Net Proceeds

PXXXXX
(XXXXX)
PXXXXX

ILLUSTRATION: DISCOUNTING
OF CUSTOMERS NOTE

 4. Determine the NET PROCEEDS FROM

DISCOUNTING
Formula:
Maturity Value
Discount
Net Proceeds

P153,000
(2,023)
P150,977

ILLUSTRATION: DISCOUNTING
OF CUSTOMERS NOTE

JOURNAL ENTRIES

ASSUMPTION 1: HANNAH MARIE SY HONORED

THE NOTE

JOURNAL ENTRIES

ASSUMPTION 2: HANNAH MARIE SY

DISHONORED THE NOTE AND THE BANK
CHARGED A PROTEST FEE OF P1,000

JOURNAL ENTRIES

 Generally, it is presented as a CONTINGENT

LIABILITY ON THE CURRENT LIABILITY side of
the STATEMENT OF FINANCIAL POSITION

Current Liabilities:
Notes Receivable Discounted

P XXXXX

PRESENTATION OF THE NOTES RECEIVABLE

DISCOUNTED ON THE FINANCIAL
STATEMENTS

DISCOUNTING
OWN NOTE

 A transaction wherein the maker issues a promissory

note to borrow a sum of money
A liability in the form of a Note Payable is being
incurred
The concept of discounting implies, that the INTEREST
IS DEDUCTED IN ADVANCE, thus the PROCEEDS
from discounting were already reduced by the interest

DISCOUNTING OWN NOTE

 To record the discounting of own-note:

Cash
xxxxx
Discount on Notes Payable
xxxxx
Notes Payable
xxxxx
*Discount on Notes Payable: computed using the interest
formula I = PRT
*Cash- proceeds from discounting
Principal
Discount
Cash Proceeds

Pxxxxx
(xxxxx)
Pxxxxx

PRO-FORMA ENTRIES

 On September 1, 2013 James Morth discounted its own

30-day 12% P10,000 note with Mary Dela Cruz
Cash
9,900
Discount on Notes Payable
100
Notes Payable
10,000
To record the discounting of promissory note

ILLUSTRATION:

 *Discount on Notes Payable is presented as a ContraLiability account, as a deduction to Notes Payable

Notes Payable
P xxxxx
Discount on Notes Payable (xxxxx)
Amortized Cost
Pxxxxx

FINANCIAL STATEMENTS
PRESENTATION

 Amortization- refers to the reduction of an amount over

a period of time
Usually prepared at the END of the accounting period

Pro-Forma Entry to Record Amortization of Discount

Interest Expense
xxxxx
Discount on Notes Payable
xxxxx

AMORTIZATION OF DISCOUNT
ON NOTES PAYABLE