Non Interest Bearing Note

Non interest bearing notes payable are issued by a business for cash, and are liabilities representing amounts owed by the business to a third party.

As the name implies, a non interest bearing note or zero interest note, does not have an interest rate and does not charge periodic interest payments on the outstanding liability. In order for the lender to get a return on their zero interest notes payable, the notes are issued at a lower price than their face value.

The difference between the face value of the notes payable and the cash received is referred to as the discount, and represents the cost to the business of issuing the note. The discount is amortized over the lifetime of the notes.

Non Interest Bearing Note Payable on the Balance Sheet

Short term interest bearing notes payable are due within one year from the balance sheet date and classified under current liabilities in the balance sheet, long term notes payable have terms exceeding one year and are classified as long term liabilities in the balance sheet.

Non Interest Bearing Note Example Journal Entry

Suppose for example, a business borrowed 7,273 cash from a lender by signing a 12 month, non interest bearing note payable with a face value of 8,000. The business receives cash of 7,273 in return for having to pay back the lender 8,000 in twelve months time.

The cash amount in fact represents the present value of the notes payable and the ‘interest’ included is referred to as the discount on notes payable.

The present value of the non interest bearing note payable is calculated using the present value formula, PV = FV / (1 + i%)n, where FV = future value, in this case 8,000, i% = the interest rate, say 10% and n= the term in years, in this case 1 year.

PV = FV / (1 + i%)n
PV = 8,000 /(1 + 10%) = 7,273

The non interest bearing note payable would be recorded as follows:

Non interest bearing note – issued at a discount
Account Debit Credit
Cash 7,273
Discount on notes payable 727
Notes payable 8,000
Total 8,000 8,000

The discount on notes payable account is a balance sheet contra liability account, as it is netted off against the notes payable account to show the net liability.

Each month a portion of the discount on the notes payable is amortized as an interest expense. In the example above, the amount is 727 / 12 = 61 per month.

Non interest bearing note payable – discount amortized
Account Debit Credit
Interest expense 61
Discount on notes payable 61
Total 61 61

At the end of the term, all the discount has been amortized as an expense to the income statement, the balance on the discount on notes payable account is zero, and the balance on the non interest bearing notes payable account is reduced to zero when payment of the face value is made to the lender.

Non interest bearing note – Payment at the end of the term
Account Debit Credit
Notes payable 8,000
Cash 8,000
Total 8,000 8,000
Non Interest Bearing Note November 6th, 2016Team

You May Also Like

Related pages

markup vs margin formulareceivables days formuladepreciation calculation in excelaccounts receivable debit or creditmcq questions on accountinghow to calculate inventory turnover ratiobad debt expense and allowanceaccounting cycle tutorialrent paid in advance journal entryaccounting for coupons journal entrynpv formula constant cash flowbasics of cash flow statementcogs formulaaccounting t chartsprocess costing calculationformula for pv ratiomicrosoft excel balance sheet templatehigh school accounting worksheetslifo reservecash payback periodbalance day adjustmentsar days outstanding formulavoucher book formatpv formula annuitydays sales in receivable formulabank reconciliation investopediaallocation base for manufacturing overheadaged receivabledupont analysis excelaccruals prepaymentsdebit journal entryreceivables turnover rateaccounts receivable samplecumulative convertible preferred stockcredit memo journal entryledger accounts exampleacid quick ratiodeclaring a cash dividendcapital lease journal entries lesseebasic accounting concepthow to make adjusting journal entriesrate volume varianceamortise meaningpresent annuity calculatordouble declining depreciation method exampleconsigned inventory accountingnpv formula annuityoutstanding mortgage calculatorlabour variancesgross margin calculator excelamortization expense journal entryaccounts receivable debitthe balance of an unearned revenue accountpurchase price variance definitionhow to do a multi step income statementfiguring gross marginaccounts payable checklistperpetuity and annuityfob shipbad debt provision journal entrydouble declining balance method equationannuity formula monthly paymentsaccounting rate of return methodvertical format of balance sheet in excelhow to calculate markup marginwhat is double entry bookkeepingpv of a lump sumwhy is a trial balance preparedcash disbursement book sampleconverting cash basis to accrual basisnet realizable value for inventorymargin and markup calculatorsingle equivalent discount rate formulabrs in accountscalculate present value of perpetuityintangibles assetshow to calculate allowance for doubtful accountsgross margin exceljournal entry to record depreciationaccounting debtors and creditors