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


grn in accountinghorizontal analysis examplethe accounts receivable ledgercredit sales vs accounts receivableincome statement balance sheet cash flow template excelbank reconciliation journal entry exampleslease accounting journal entriescontra in accounting exampleaccounting ocicalculate days sales in receivablesallocation base for manufacturing overheadhow to do fifo methodhow to figure out markup percentagewhat is npv in excelvariable overhead rate formulahow to calculate an annuity factorimprest bank accountxxx wiprecording petty cash transactionsbeginning retained earnings formulaarr calculatormarkup percent calculatorcontribution margin income statement formatvertical analysis of income statement exampledefinition payback periodrealisable value accountingsample of general ledger sheetallowance for doubtful debts in balance sheetprepaid freight definitionpresent value of annuity due of 1 tablecontinuously compounded formulaunearned revenue adjusting entryasset retirement obligation journal entry exampleaccrued liability journal entrytimesheet examplebank recsdefine contrasaccount receivable turnover measuresdeferred tax assets and liabilities examplesconsignee account numberoverheads in accountingexamples of manufacturing overheadhow to compute gross profitbook keeping journaldouble decline depreciation examplewhat is vertical analysis of financial statementsdefine sundry debtorsaccrued revenue in balance sheetbond sinking fund journal entrycapacity utilization calculation formulaaccounting bank reconciliation templatelump sum annuity formulastraight line amortization formularatio gearingsales ledger control account formatnpv in accountingeom meanrecording bad debtswhat is office supplies expense in accountinghow do you calculate inventory turnover ratioan example of a contra asset account ishow to calculate overhead variancecalculating depreciation using straight line methodpv of growing annuitymeaning of accrued interestasset register exampleperpetuity exampleshow to calculate marketable securities from balance sheetcalculating ending inventorycalculating double declining balancetemplate for petty cashwhat is imprestjournal entry for invoicecontra in accounting exampledeferred expenses journal entry