Notes Payable

Most interest calculations that you will encounter are simple interest calculations. In a simple interest calculation, interest is calculated for a defined period of time based on the outstanding balance. Simple interest is used for savings accounts, notes receivable, notes payable, bonds, student loans and lots of other applications. We will discuss how simple interest calculations apply to debt, but the methodology is the same for other applications.


The amount of interest charged on a loan is based on three factors: principal, interest rate and time.

Principal is the outstanding balance on a loan. As a loan is paid down, the principal balance decreases. Therefore the interest on the loan also decreases. If the monthly payment on the loan is an equal amount each month, over time, less of the payment will go to interest and more to the principal balance.

The interest rate is the amount of interest charged on the loan. Typically, interest is expressed as an annual percentage rate, also called APR. Although interest is expressed as an annual rate, most loans charge interest monthly. To calculate the monthly rate, divide the annual interest rate by 12.

Time is the duration over which the interest is accruing. If interest is charged monthly, typically we would use the number of days the month divided by 360. Yes, I know there are 365 days in a year, but before calculators and computers, it was much easier to calculate based on 360 days. This became the tradition even after the invention of calculators because banks found they would earn more interest on outstanding debt using 360. Pretty sneaky, huh?

To calculate the amount of interest on a loan, we use this formula:

Interest = P*R*T or Principal * Rate * Time


On February 1, Technorama borrows $10,000 from the bank on a 8%, 90-day note with interest due at the time of repayment. How much cash will Technorama need to pay off the note when it comes due?

First, we need to identify our PRT. Principal is the amount borrowed, $10,000. The rate is 8%. Remember that rates are expressed as an annual rate even though the loan is only for 90 days. The duration of the loan, time, is 90 days. Now we can set up our formula.

Interest = $10,000 * 8% * 90/360

Interest = $200

The question asks how much cash will be required to pay off the note. $200 is not the answer. To pay off the note, Technorama must pay the interest and the principal. Therefore, the cash required is $10,200.

When doing simple interest calculations, just remember PRT. Always use the annual rate and multiply it by the amount of time for which you are calculating the interest.

Share This:

Related pages

trial balance is prepareddepreciation landscalculate accumulated depreciationdiscount on bonds payable on balance sheetdefine cost as applied to the valuation of inventoriescontribution margin ratewhat are fixed overheadshow much is my premium bond worthsegmented income statement in the contribution format examplehow to calculate bad debt expensewhat is the purpose of adjusting journal entriesannuity to present valuecash accounting balance sheetwhat is overhead absorptionunearned revenue debitfull accounting cycle examplesllc balance sheet templatepresent value annuities2014 payroll tax calculatorentry for accrued expensesjournal entry of accrued incomeestimated overhead cost formulapv of an ordinary annuity tablecontribution margin income statement examplein preparing a bank reconciliation outstanding checks arecorrecting entries accountingfixed cogsp&l statements for dummiesjournal entry of loan taken from bankexamples of direct laborhow to calculate sales ratiodepreciation and salvage valueexamples of managerial accounting reportsabsorption costing income statementproduct mix exampleunderappliedhow do you calculate variable costwhen valuing ending inventory under a perpetual inventory system thesocial security and medicare withholding ratesunearned revenue journal entryprepare journal entries to record the transactionsinterest receivable entryequity accounting journal entriesfinancial accounting vs managerialwhat type of account is unearned revenueprepare a statement of cost of goods manufacturedaccrued warrantydepreciation formula straight linehow to find manufacturing overheadaccrued interest entrywhat are credit sales on a balance sheetdouble declining balance depreciation formulaaccounting tabular analysistvc calculationunit labour cost formulaallowance method of accountingexamples of merchandisingformula for salvage valuebad debt recovery journal entrycalculating cost of goods available for saleadjusting entries can be classified asmarket value of bond formulawhat taxes should be withheld from paycheckaccrued income journalformula for contribution margin ratioprofit is calculated by subtracting costs fromhow to calculate ending cash balancewhat are the uses of trial balanceallowance for bad debt income statementwhat are examples of fixed expensesinvestment turnover formulaadjust allowance for doubtful accountshow to make income statement from trial balancepreparing journal entries examplesfinancial accounting versus managerial accounting