INTEREST

Interest- is the amount paid for the use of money. Interest may either be an income or expense. It is
expense to the borrower and an income to the lender. Interest is computed on an agreed rate of
interest on the sum borrowed or lent.

-A promissory note evidences the indebtedness. It is a written promise made by a maker promising to
pay a person called “payee” a sum certain in money at a fixed or determinable future time.

Parts of a Promissory Note

1. Date of the note is the date when the note is drawn.

2. Face of the note is the amount borrowed or lent.

3. Date of maturity is the date on which the note is to be paid.

4.payee is the person to whom payment is to be made.

5. Maker is the person who promises

to pay the note.

6. Maturity value is the amount to

be paid on its maturity date.

Rosario, Cavite

June 1, 2020

P10, 000.00

FOR VALUE RECEIVED, I promise to pay Mrs. Caridad Sanchez the sum of ten thousand pesos on
or before July 31, 2020.

PERLA GOMEZ

(Non- interest-bearing note)

 Cavite City

August 1, 2020

P5, 000.00

THIRTY DAYS after date I promise to pay to the order of MRS. ERLINDA HERNANDEZ FIVE
THOUSAND PESOS, Philippine currency with interest at 12%.

MAYLIN GUTIERREZ

Due: August 31, 2020

(Interest-bearing Note)

In the above example,

 The borrower (Maylin Gutierrez) is the maker of the note.

 The lender (Erlinda Hernandez) is the payee.
 August 1, the date of the note.
 P5, 000 is the face of the note.
 August 31, the maturity date.
 30 days is the term of the note.

How to Compute Interest

Interest= Principal x rate x time (I=prt)

Where:

P- is the principal or the original amount

r- is the rate of interest

t- is the time expressed in years

If the time is expressed in number of days or months, convert them in their

equivalent in year using this formula:

I= P x r x No. of months/12 months

I= P x r x No. of days/ 360 days

Accounting Entries

A promissory note may either be interest-bearing or non-interest bearing.

An interest-bearing note is one where interest is computed on the principal. Non-interest bearing note
does not carry

interest rate.

The following instances will give rise to the

receipt of a note:

1. The business sells on account receiving

a note therefor;

2. A note is received when an open

account cannot be settled at the date

of payment

3. When the business lends money

Case 1- The business rendered service on account for P1, 000 receiving a note

therefor;

Notes Receivable 1, 000

Service Income 1, 000

Case 2- The customer being not able to pay his account on July 1 issued today, August 31, a note

for P3, 000.

Entries:

July 1 Accounts Receivable 3, 000

Service Income 3, 000

Aug. 31 Note Receivable 3, 000

 Account Receivable 3, 000

Case 3- The business lent P5, 000. An interest of P500 was already deducted.

Note Receivable 5, 000

Cash on hand 4, 500

Interest Income 500

The 60 day, 6% rule

Under this rule, we can say that the interest on any principal at 6% for 60 days

is the quotient of itself divided by 100.

From this we can say that:

1. The interest on any sum for 60 days at 6%, move the decimal point two places to

the left.

2. The interest on any sum for 6 days at 6%, simply move the decimal point three places

to the left.

3. The interest on any sum for 600 days at 6%, simply move the decimal point one

place to the left.

Determining the Maturity Date

A note which expresses time in months or years matures on the same day it was written
counting forward the number of months or years specified on the note.

When the note expresses the time in days, the maturity ate is the actual number of days after
the date of the note.

Determine the maturity of a 120 day note dated June 1.

Step 1- Determine the number of days in

June- 30 days;

Step 2- Deduct the date of the note,

June 30-1= 29 days;

Step 3- Count forward until you get 120 days

 30 days in June

-1 date of the note

29 days left in June

31 days in July

31 days in August

29 days needed in September to

complete the 120 days

120 days

The maturity date is September 29.

Business transactions are supported by documents. They are pieces of evidence

of payments made and receipts of cash.

1. Cash voucher is a document which evidences payment. It contains information about

the transaction, the payee, the approving official.

2. Official receipt is a document which evidences receipt of cash. It contains

information as to the payor, and the transaction involved.

3. Cash sales invoice is a business document which evidences sale of services or merchandise for cash
only.

4. Account sales invoice is a document prepared for sales on account only. It contains information about
the buyer, the description of the things bought, and the terms and conditions surrounding the
transaction.

5. Check is issued when payment is made from the cash deposited in the bank. A

checkbook will be given when a checking account is kept with any bank. Payment by check is convenient
to avoid handling too much cash and thus prevent theft.

6. Credit memorandum is a business paper issued by the seller to the buyer when the

buyer returns the thing bought or asks for an allowance for the defect of the thing.

7. Purchase invoice is a business document which shows the name of the

supplier, the items bought and other terms and conditions surrounding the purchase. On the part of the
seller, an invoice is a sales invoice; to the buyer, it is a purchase invoice.
8. Debit memorandum is a business paper showing that your account has been reduced by items that
are charged against you. Both debit and credit memo are just notices about your account.

9. Deposit slip is a document evidencing the deposit of money in the bank. Every time a deposit is made,
a deposit slip is filled up.

10. Promissory note is a written promise made by the maker to pay the payee(creditor) a sum certain

in money at a fixed or determinable future time.

Chapter III

Elements of Accounting

THREE ELEMENTS OF ACCOUNTING

1.Assets

2. Liabilities

3. Owner’s Equity

ACCOUNTING EQUATION:

Assets= Liabilities + Owner’s

Equity

 It means that the assets of the business are contributed by the ownerand creditors.

Assets = Owner’s Equity

 This means that the assets of the business are contributed only by the owner.

Assets - Liabilities = Owner’s

Equity

 This shows the equity or capital of the owner from the total assets of the business after
deducting the claims of the creditor.
Assets - Owner’s Equity =

Liabilities

 This equation shows the obligations of the business to the creditors. It gives the debts of the
business to people rather than the owner.

Debit side – the left side of the T account. It comes from the Latin word “debitur”. It is abbreviated as

Dr.

Credit side – the right side of the T account. It comes from the Latin

word “creditur”. It is abbreviated as Cr.

Illustration: Accounting

Equation

Case 1

Assets

P100,000

Liabilities

P50, 000

Owner’s Equity

Using the equation, A = L+OE

what is the answer?

Case 2

Assets

P50,000
Owner’s equity

P30,000

Liabilities

Using the equation L = A- OE,

what is the answer?

Case 3

Liabilities

P80,000

Owner’s Equity

P50,000

Assets

Using the equation A = L+OE,

what is the answer?

Chart of Accounts – is a list of account titles used by the bookkeeper as a guide in

recording business transaction.

The following accounts are listed

down in the chart of accounts:

1.Assets

2.Liabilities

3. Owner’s Equity

4. Income

5. Expense

Account – is a record kept for each asset, liability, owner’s equity, income and expense item. It shows

the changes in each item.

-An account shows the total additions, subtractions, and the balance of an asset, liability and

owner’s equity account.

An account title may be expressed in the form of capital “T” which is called the T- account.

Account Title

Received cash payments with the following amounts:

P5,000+5,000+3,000

Paid the following amounts in cash:

P3,000+1,000+500

Balance or remaining cash is

P8,500 (P13,000-4,500)

Description:

1. The account name is cash on hand

2. The left side of the cash account will show the cash received by the business

3. The right side shows all the payments made or the total cash paid. The perpendicular line

separates the amount received from the cash paid out. The T- account will show the summary of the
cash transaction only.
4. There will be many T- accounts as there are account names or account titles.

“Assets are normally on the debit side”

 This means that the amount received are usually much more than the amount given out.

“Liabilities and owner’s equity are normally on the credit side”

 This means that there are more liabilities incurred than paid and for owner’s equity, there are
more capital invested than withdrawals of capital by the owner.

Theory of Debit and Credit

 Transactions are exchanges of values. “For every value received, there is an equal value parted
with.

Double- entry bookkeeping method – refers to the double- effect in accounting transaction.

The value received is the debit and the value parted with is the credit

Illustration:

Suppose that a business purchases merchandise for cash. In this case the business receives an

asset in the form of merchandise and gives in exchange another asset in a form of cash.

Journal Entry:

Merchandise Pxx

Cash Pxx
Rules in Debit and Credit

We Debit:

a. Asset received
b. Liabilities paid
c. withdrawals or drawings
d. cost or losses
e. expenses

We Credit:

A. Assets given away

b. liabilities incurred

c. investment or capital

d. income or gain

Items that Increase Assets

1. Investment or Capital
2. Additional Investment
3. Acquisition of things of value by the business
4. Claims or receivables
5. Donations of assets

Items that Decrease Assets

1. Payment of cash
2. Withdrawal of assets
3. Sale of assets
4. Assets given away as donations

Items that Increase Liabilities

1. Acquisition of things on account

2. Incurrence of other liabilities
3. Assumption of a liability
Items that Decrease Liabilities

1. Payment of accounts
2. Return of things bought
3. Incurrence of another form of liability to extinguish a former liability

Items that Increase owner’s Equity

1. Original capital
2. Additional capital
3. Income
4. Gains on sale of other assets

Items that Decrease Owner’s Equity Expenses

1. Expense
2. Withdrawals
3. losses

Components of Owner’s Equity or

Capital

1. Original capital
2. Additional capital
3. Income
4. Drawing or withdrawal
5. expenses

Sample transactions: Analyze what

you received and what you parted

with.

1.Your mother asked you to

buy

vinegar for

P2.00.
2. You bought a notebook

from

National bookstore

for P20.00.

3. You bought a pencil on

account.

4. You paid your account in

No.3.

Increase in asset and an increase

in capital or owner’s equity

increase in asset and an increase

in liability

Increase in one form of asset and a

decrease in another form of asset

Effects of transaction in Accounting

Equation

4. Decrease in asset and a decrease in liability

5. Decrease in one form of liability and an increase in another form of liability

6. Decrease in asset and a decrease in capital or owner’s equity