Journal entry for borrowing from bank on note payable

Introduction

Sometimes, we may need to borrow money from the bank by issuing a promissory note with the promise of paying back both principal and interest at a certain date in the future. In this case, we need to make the journal entry for borrowing from the bank on note payable in order to account for the liability that exists at the time of receiving the money from the bank for the borrowing.

And as the borrowing on note payable usually comes with the interest, we also need to record the accrued interest that occurs during the period in order to comply with the accrual basis of the accounting. Otherwise, there may be an understatement of total expenses on the income statement as well as an understatement of the total liabilities on the balance sheet.

Of course, if the borrowing on the note payable is a short-term one and it ends during the accounting period that it starts, we don’t need to record the accrual interest. In this case, we can simply record the interest expense when we make the interest payment at the end of note maturity.

Borrowing from bank on note payable journal entry

We can make the journal entry for borrowing from the bank on note payable by debiting the cash account and crediting the notes payable account.

Issuing note for borrowing:

Account	Debit	Credit
Cash	$$$
Notes payable		$$$

This journal entry of the borrowing on note payable will increase total assets as a result of receiving cash from the borrowing as well as increasing total liabilities on the balance sheet as a result of issuing the promissory note to the bank.

At the end of the period-end adjusting entry, we may also need to make the journal entry for the accrued interest on borrowing by debiting the interest expense account and crediting the interest payable account.

Accrued interest:

Account	Debit	Credit
Interest expense	$$$
Interest payable		$$$

This journal entry is necessary to avoid the understatement of the total expenses on the income statement as a result of not recording the interest expense that has already occurred as well as to avoid the understatement of the total liabilities on the balance sheet.

Later, when we make the interest payment on the borrowing, we can make the journal entry of debiting the interest payable account and crediting the cash account.

Interest payment:

Account	Debit	Credit
Interest payable	$$$
Cash		$$$

This journal entry will eliminate the interest payable which is a liability that we have recorded for the accrued interest previously.

At the end of the note maturity, when we make the payment for borrowing on the note payable, we can make the journal entry with the debit of the notes payable account and the credit of the cash account.

Payment for borrowing on note:

Account	Debit	Credit
Notes payable	$$$
Cash		$$$

This journal entry will eliminate the notes payable that we have recorded at the time of issuing the promissory note to borrow the money from the bank.

Example for the borrowing on note payable

For example, on January 1, 2022, we have borrowed $10,000 from the bank by issuing a promissory note with a 10% annual interest attached. On the promissory note, we promise to pay back the principal of $10,000 with the 10% or $1,000 interest on January 1, 2023.

In this case, on January 1, 2022, we can make the journal entry for the $10,000 borrowing from the bank with the note payable by debiting the $10,000 into the cash account and crediting the same amount to the notes payable account as below:

January 1, 2022:

Account	Debit	Credit
Cash	10,000
Notes payable		10,000

This journal entry of borrowing with the note payable will increase both total assets and total liabilities on the balance sheet by $10,000 as of January 1, 2022.

Later, at the period-end adjusting entry of December 31, 2022, we can make the journal entry for the accrued interest on borrowing by debiting the $1,000 which is the accrued interest for the period to the interest expense account and crediting the same amount to the interest payable account as below:

December 31, 2022:

Account	Debit	Credit
Interest expense	1,000
Interest payable		1,000

The journal entry of this $1,000 accrued interest on borrowing will increase the total expenses on the income statement by $1,000 as well as increase the total liabilities on the balance sheet by the same amount as of December 31, 2022.

Then, on January 1, 2023, when we pay back both the $10,000 principal and the $1,000 interest of the borrowing that we have promised, we can make the journal entry as below:

January 1, 2023:

Account	Debit	Credit
Notes payable	10,000
Interest payable	1,000
Cash		11,000