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KSERV
08-14-2003, 07:28 PM
I need to make sure I am setting up a loan correctly. I know I put the total amount borrowed into a N/P - account. But when I am making payments do I put this against the N/P account or is it applied to what was purchased? Help!

lustbergcpa
08-14-2003, 11:52 PM
You will set-up the Notes Payable as a liability account. When you make your payment, you apply the principal amount to the Notes Payable account and the interest portion to interest expense.

Example

Made a monthly pmt of $500.00

Notes Payabe - Debit $410.00 - Principal
Interest Expense - Debit 90.00 - Interest

Cash - Credit - $500 for payment.

Remember that each month the payment will be the same. However, the amount allocated to principal and interest will change (interest will be less each month)

plg
08-15-2003, 07:13 AM
Actually, if the note is payable for more than a year, you should have two accounts. One in Current Liabilities and one in Long Term Liabilities.

When you begin making payments, you lower the balance of the Long Term account first, going to the Current account only during the last 12 months of the note.

brecor
08-17-2003, 07:45 PM
Also just to note - when you originally record the note amount, that is when you would put the debit to what you bought (financed) and the credit to the note liability itself.