A note payable is a written agreement for money a business owes another party. When a business uses a note payable to purchase assets, such as equipment, it uses a journal entry to book the transaction in its records. A journal entry lists the amount of debits and credits made to the accounts involved in a transaction. Debits and credits either increase or decrease an account, depending on the account. The journal entry to log a purchase with a note payable impacts at least two of your small business’s accounts.
The first account affected by the journal entry is the specific asset account for the item you acquire with a note payable. Record a debit to this asset account in a journal entry for the amount of the purchase. A debit increases an asset account on the balance sheet. For example, assume your small business buys a $20,000 computer server using a $20,000 note payable. Record a debit to the computer server account for $20,000.
The notes payable account is the second account you must adjust in the journal entry. Record a credit to this account for the amount you borrow on the note. A credit increases the notes payable account, which is a liability on the balance sheet. If the amount of the note payable covers the entire cost of the purchase, this is the last account in the journal entry. Using the previous example, credit $20,000 to the notes payable account, which is the final account in the entry.
If the amount of the note payable is less than the asset’s full cost, record a credit to the cash account for the difference between the asset’s cost and the note payable amount. A credit decreases cash, which is an asset on the balance sheet. In the previous example, assume the note payable was for $15,000 and you paid $5,000 cash for the rest of the $20,000. Credit $15,000 to the notes payable account instead of $20,000, and credit $5,000 to the cash account in the same journal entry.
To complete the journal entry, record the date of the purchase, and include a description of the transaction that identifies the acquired item and any other relevant details, such as the note’s interest rate. In the previous example, assume you bought the server on Nov. 1 and the note payable is due in 180 days with interest at a 7 percent annual rate. You would record “11-1” for the date and include a description that might say “Bought computer server with 7 percent, 180-day note payable.”
