notes receivable

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

example of projected income statementcommon stockholders rightsbad debt reserve journal entrypurpose of preparing trial balancecontribution margin per direct labor hour formulastock average down calculatorbalance sheet closing entrieshow much is semiannuallymarket value of bonds calculatorwhat is contributed equityhow to write an income statementcalculation for retained earningsdeclining balance formulawhat is the purpose of the adjusted trial balanceamortized discountprovision of doubtful accountstotal fixed cost formula accountingdoes land depreciateoverhead absorptionpayroll general ledger entriesthe income summary account is a permanent accountdepreciation expense journal entrydouble declining balance depreciation calculatorcontra asset meaninghow to calculate the market value of a bondcalculate tax deductions paycheckperiodic inventory system cost of goods soldadjusting journal entries examplewip formulafinancial accountingsdepreciation for furniture and fixtureshow to calculate retained earningcost of goods sold per unit formulareversing journal entries examplestraight line method of amortization calculatorsales per labor hour formulafed withholding taxcalculate net pay floridaexamples of selling and administrative expensesjournal entry for leasehold improvementsfair value adjustment journal entryaccounts receivable debit creditjournal entry for receiving payment on accountexample of accounting worksheetjournal entries of accounts payableallowance for uncollectible accounts t accountcost accounting fifo methodfifo method in cost accountinghow do you find ending inventoryvaluing bonds formulastraight line method depreciation formulabad debts accounting entryaccounting accounts receivable journal entriespurchase returns and allowances debit or creditprepare t accounts for manufacturing overhead and work in processlabor costingsperpetual inventory meaningdifference between annuity due and ordinary annuitytake home pay calculator texas hourlycalculate payroll taxes floridatfc formulaexample cash flow statement indirect methodcost of goods sold formulaspresent value annuity tablesmerchandising company income statementpremium bond interest ratehow to calculate finished goods inventorycogs formula manufacturingdistinguish management accounting from financial accountingprepaid insurance in balance sheetexample of straight line depreciationanother word for retained earningsoverhead journal entrybank debit memo journal entry