Installments note payable
Sometimes a note extends beyond one year. More often than not when a note extends beyond a year, more frequent payments are required. When more than one payment is required for a note it is called an installment note. Each note payment includes a principal plus interest payment.
An installment note is recorded just like a single payment note when the note is acquired. The cash is debited at the acquisition of the note and the installment note payable is credited.
| Cash | |
| Installment Notes Payable | |
Unlike a single note payment, installment notes need be amortized over the term of the note. The note is usually paid in equal installments. In other words all payments are usually the same. Amortization is the method used to determine what portion of the payment is allocated to principle or interest. For example Uncle Joe takes a 5 year installment note in the amount of $10,000 at 8%. The amortization table will be shown as below:
| Period | Principal Bal at beginning of period | Cash payment (Same every payment) | Interest expense (Principal * Rate) | Principal Repayment (Cash payment minus interest payment) | Principal Balance at end of period |
| 1 | $10,000.00 | $2,504.56 | $ 800.00 | $1,704.56 | $8,295.44 |
| 2 | $ 8,295.44 | $2,504.56 | $ 663.64 | $1,840.92 | $6,454.52 |
| 3 | $ 6,454.52 | $2,504.56 | $ 516.36 | $1,988.20 | $4,466.32 |
| 4 | $ 4,466.32 | $2,504.56 | $ 357.31 | $2,147.25 | $2,319.06 |
| 5 | $ 2,319.06 | $2,504.56 | $ 185.52 | $2,319.06 | $ – |
In this example, payments were made at the end of the accounting period. The journal entry will be as follows:
| Interest Expense $800
Installment Note Payable $1.704.56 |
|
| Cash $2,504.56 | |
The same entry (with the corresponding amount) is made for each period.