>> A long term notes payable,
is also a very common way for companies to finance operations in growth.
A long term notes payable is a contract between a lender,
a bank, for example,
and a borrower, a company.
The lender lends cash to the company.
We call this the principal amount.
The company agrees to repay the principal plus interest at some point in the future,
as detailed in the loan contract.
There are a lot of different types of loans,
but I want to introduce you to the three most common for long term business loans.
They are an installment note,
a balloon payment note and a mortgage.
Many of you might be familiar with the concept of an installment loan.
If you've ever taken out a loan that requires regular monthly payments,
chances are it was an installment loan.
A common characteristic is that the monthly payment amount is fixed.
Additionally, a portion of the payment goes to pay accrued interest,
and the remainder to reduce the principal amount.
This continues month after month until the loan has been paid off.
A balloon loan isn't very common for individuals,
but it is for businesses,
especially large businesses with access to a lot of cash.
A common characteristic is that no monthly payment is required,
payment for both the accrued interest and principal are due at the end of the loan.
An example might be a company that is starting a new product line,
and they might want to repay a loan several years
after the product line has been established and is quite profitable.
A mortgage, is a type of installment loan that is secured by real property,
meaning land and/or building.
I want to mention this one,
because business loans are secured differently than loans for individuals.
Large organizations often provide no specific security for long term notes.
Small organizations might be required to list all of
the business assets and possibly the owner's assets too in order to secure a loan.
The focus of this video is going to be on mortgage payable.
So let's wrap up this topic with an example.
On July 1, Joy Division signed a 24 month promissory note to borrow
$11,000 plus six percent annual interest to acquire a small recording studio.
The note payable will be secured by the property,
making this a mortgage.
They will be making monthly loan payments of $500 beginning on August 1st.
So what's the journal entry to record the long term note payable?
You can see it's a debit to cash and a credit to mortgage payable for $11,000.
In order to easily make the journal entry to record the monthly loan payment,
companies prepare an amortization schedule.
I've shorten this one to fit on the screen,
but it would show each month until the loan balance is zero.
You might recall that interest is calculated by
taking the principal times the interest rate times time.
In this example, that's how the interests column amounts are calculated.
The principal reduction is the difference between
the payment amount and the amount of interest expense.
We can use the amortization table to find
the data needed to record the journal entry for the monthly loan payment.
We need the payment amount,
the amount of interest expense,
and the amount that the notes payable is reduced.
Using the information from the table,
we debit interest expense for $55,
debit mortgage payable for $445,
this is how we reduce the liability,
and credit cash for $500.
We could have just as easily recorded the journal entry for November 1.
You can see the data highlighted in the amortization table.
So we would debit interest expense for $48,
debit mortgage payable for $452
and credit cash for $500.