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

sold merchandise on account journal entrymanagerial accounting versus financial accountingaging of receivablessalaries and wages payable journal entrysocial security tax withholding limitfifo cost of ending inventoryprt interestrecording prepaid expensesabsorption costing vs variable costingwhat is unadjusted trial balanceseparate legal personalitypass journal entries for the following transactionswage payable journal entrytemporary accounts accountinghow long before a debt is uncollectibleimportance of contribution marginnormal balance for accounts receivableassets liabilities equity examplesaccounting for withholding taxmeaning of asset turnoverbad debt expense formuladepreciable valueunearned sales revenue balance sheetprepaid rent expense journal entrywhat accounts have a normal debit balancecollected accounts receivableadjusting entries affect only expense and asset accountshow is federal withholding tax calculatedformula of total asset turnover ratioemployer should record payroll deductions asvariable cost definition and examplenotes payable adjusting entrybond retirement journal entryhow to prepare closing entries in accountingcalculate medicare taxprepare post closing trial balancedifference between managerial accounting and financial accountinghow to calculate receivablesthe purpose of adjusting entries is tocompute manufacturing overheadcurrent portion of long term debt journal entryaccruals and prepayments journal entriesis prepaid expense a liabilityoverhead ratedividends debit or creditlifo cogscalculate gross pay based on net payending inventory equationselling and administrative expenses formulavariable absorption costinghow to determine manufacturing overheadaccrued payroll liabilitieshow to calculate actual manufacturing overheaddepreciation charges on fixed assetsbad debt provision journal200000 annuityoverhead varianceshow to calculate wacjournal entry for prepaymentadjusting entries questionsaccount receivable formulamanagerial and financial accountingjournal entry payrollcash premium bondsabsorption costing equationunearned revenue iscalculate variable expensesbi weekly tax calculatorhow to find fica taxgross wages calculatorbond calculator present valuecalculate depreciation using straight line methodincremental profit formulabills receivable journal entry