Journal entry for purchasing equipment with note payable

Introduction

Note payable is the promissory note that we issue to the other party in exchange for the cash or other assets by promising that we will pay certain amount of money at the certain date stated in the note. Likewise, we may issue the note payable to purchase equipment from our vendor. In this case, we need to make the journal entry for purchasing equipment with the note payable by recording our debt to the note payable account.

The transaction of purchasing equipment with note payable is similar to the purchasing with the accounts payable. And both total assets and total liabilities on the balance sheet will increase by the same amount.

However, we usually need to bear the interest on the note payable when we issue the promissory note to purchase the equipment from the vendor. Additionally, unlike the accounts payable, note payable tends to have a longer period of maturity, in which it could be 3 months, 6 months, or 9 months, etc. Of course, it can even be more than one year for a long-term note payable.

Journal entry for purchasing equipment with note payable

We can make the journal entry for purchasing equipment with note payable by debiting the equipment account as a fixed asset on our balance sheet and crediting the notes payable account as a liability that we owe to the vendor.

Account	Debit	Credit
Equipment	$$$
Notes payable		$$$

The note payable in this journal entry should be classified in the short-term liability section on the balance sheet if its payment term is within 12 months period. On the other hand, it should be classified as a long-term liability if its term is more than 12 months.

At the later date, we can eliminate this amount of note payable when we honor the promissory note that we have issued for purchasing the equipment by paying the promised amount to the vendor.

In this case, we can make the journal entry for honoring the note payable on purchasing the equipment with the debit of the notes payable account and credit of the cash account as below:

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

Additionally, if the note payable that we have issued has an interest attached, we also need to make the journal entry for the payment of the interest on the note payable as below:

Account	Debit	Credit
Interest expense	$$$
Cash		$$$

Of course, if the payment of the note payable and the interest attached to it are on the same date, these journal entries are usually combined into one as below:

Account	Debit	Credit
Notes payable	$$$
Interest expense	$$$
Cash		$$$

Example for purchasing equipment with note payable

For example, on January 1, we have issued a $10,000 note payable in order to purchase office equipment from one of our vendors. In this $10,000 promissory note, we promise to pay back this amount with a 10% annual interest on June 30.

In this case, we can make the journal entry for the $10,000 purchase of equipment with the note payable by debiting this amount to the equipment account and crediting the same amount to the notes payable account on January 1, as below:

January 1:

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

This journal entry of issuing the note payable to purchase the equipment will increase both total assets and total liabilities on the balance sheet by $10,000 as of January 1.

Later, on June 30, when we honor this $10,000 promissory note that we have issued by paying back this amount together with a 10% interest or $500 ($10,000 x 10% x 6/12), we can make the journal entry as below:

June 30:

Account	Debit	Credit
Notes payable	10,000
Interest expense	500
Cash		10,500

This journal entry will increase total expenses on the income statement by $500 as a result of promising to pay a 10% interest on the note payable on June 30.