PROMISSORY NOTES Ch 20 Essay example

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Cash is the primary medium of exchange for business transactions
(CONCEPT: Unit of Measurement)

Cash is used to purchase merchandise and to pay salaries and other expenses. In turn, businesses receive cash when they sell their products or services and collect payments. The cash received can be used to purchase more merchandise and continue to pay salaries and other expenses. Thus, the business cycle continues.

Sometimes a business receives more cash from sales than is needed to pay for purchases and expenses. A business may deposit the extra cash in a bank for a short period. At other times, the receipt of cash from sales does not occur at the same time and in amounts sufficient to pay for needed purchases and expenses. When this occurs, a business needs to borrow additional cash or make arrangements with its vendors to delay payment for a period of time. Generally, when a bank or other business lends money to another business; the loan agreement is made in writing.

A written and signed promise to pay a sum of money at a specified time is called a promissory note. A person or organization to whom a liability is owed is called a creditor. Promissory notes signed by a business and given to a creditor are called notes payable. A note payable is frequently referred to as a note.

Promissory notes are used when money is borrowed for a period of time from a bank or other lending agency. Sometimes a business requests a note from a customer who wants credit beyond the usual time given for sales on account. Notes have an advantage over oral promises and accounts receivable or payable. Notes can be useful in a court of law as written evidence of a debt.


An amount paid for the use of money for a period of time is called interest. Banks and other lending institutions charge interest on money loaned to their customers. The interest rate is stated as a percentage of the principal. The interest at 10% means that 10 cents will be paid for the use of each dollar borrowed for a full year.

When businesses borrow money from banks, other lending institutions, or other businesses, promissory notes should be prepared to provide written evidence of the transaction.

Sometimes partial payments on a note are made each month. This arrangement is particularly true when an individual buys a car and signs a note for the amount owed. Each monthly payment includes part of the principal and part of the interest to be paid.

To calculate interest for one year, the principal is multiplied by the interest rate. The interest rate on a $20,000.00, 6% note for one year is $1,200.00

The time of a note issued for less than one year is typically stated as a number of days, such as 30 days, 60 days, or 90 days. The time used in calculating interest is usually stated as a fraction of