 In this presentation, we will record the journal entry related to the payments of an installment note, including both principal and interest components. Support accounting instruction by clicking the link below, giving you a free membership to all of the content on our website, broken out by category, further broken out by course, each course then organized in a logical, reasonable fashion, making it much more easy to find what you need then can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Our data is on the left side and we have our annuity table which will help us on the right side. We're going to enter our journal entries into our general journal. We'll post them to our worksheet here. Our trial balance is in order with the assets, liabilities, equity, income and expense, debits being represented with positive credits with negative meaning that the debits equal the credits and we have net income of 700,000 at this time. This is just to give us something in balance that we start with so that we can see the effect on the accounting equation, individual accounts and account components here. Our data over here is that we had a loan initially of 100,000. The interest rate was 9% 36 pay periods. So this is normal installment type note that we're going to pay an equal amount each month for a loan of the 100,000. We then put that on the book so we can see it's on the books now because here's our note 100,000. We haven't made any payments it's not been reduced at all so we're going to make the first payment. In order to do that we have to have our table. Note in practice if you look at a loan they may only give you this information. They're going to say here's the loan amount, here's the interest rate, here's the number of payments, here's the payment amount and they may only give you less than this. They may not even give you all of this because they could leave one of these out like the payment amount or they have to give you the payment. They may not tell you the interest rate which you'd have to derive then from the other information because any of these left out you could figure out what the other would be based on you know just math. So in any case we know the payment so you would think that obviously cash is affected we're going to pay this amount. So we know that so we could even do that now and say well cash is affected. We're going to say cash is going to go down, cash is a debit balance amounts. We're going to make it go down doing the opposite thing to it. I'm going to put that on the bottom, I'm going to skip two lines because I happen to know that there are going to be two other accounts. If you start to build this from scratch and you want to put cash on top and credit it, do that. Do that rather than thinking about something else first you know whatever makes sense to build this thing out. So I'm going to right-click and paste one, two, three. Now the cash is going to be given so it's just going to be the or we can take it from the table I'm going to say negative of this number. All of our payments are going to be the same so it's negative of that number and there we have it. But the problem is that you know cash what are we paying for? We're paying for partially interest and partially principal and we don't know what the breakout is based on this information it doesn't tell us. So what we have to do is break that out with an amortization table. So we made the amortization table in a prior period and a prior presentation if they give you an amortization table great. If they don't oftentimes not they don't then we can derive it which we showed in a prior presentation once we have it then we can say okay I'm going to highlight this and just say this is our first payment and so we're paying this amount each time and this is how much we're going to break out to interest and principal. Note again it changes each time so it's not like we can just copy the first paper we can't just do what happened last time we need the table. So okay so we're going to say interest is $750 and principal is $2430. So we have interest expense it's going to go up as all expenses do by the interest portion so it's a debit balance account we'll do the same thing to it another debit. So I'll copy interest expense we'll put that up top in V3 right click and paste 123 and then I'm going to say this equals and I'm just going to pick up the amount of interest per our amortization table 750 and then the principal of course is the difference it's going to be this minus that or 2003 2003 430 which should also be on our table 2004 30 so the difference is going to be reducing the principal so the loan amount is going to go down not by the full amount we paid but by the amount that's not allocated to the interest so we'll copy the note payable we'll put that here in the middle and B4 right click and paste 123 and I'm going to put that that's a debit because this is a credit amount we need to make it go down so we're doing the opposite thing to it and obviously that's what we need to be in balance as well so I'm going to put a debit and say this equals and also pull this from the table so there's our there's our transaction here so obviously these are two amounts that are being drawn from the table okay and so once we finish this and record it then our balance here should go down to that and we should record our 750 interest so let's do that so we're going to say that interest is here we're going to record this here on our trial balance in each 10 equals pointing to that 750 that's going to bring interest up in the debit direction put us out of balance and bring net income down then we'll record the note payable here's notes payable here's notes payable we're in the middle column in H6 equals that's 2004 30 bringing this 100,000 down by the 2004 30 to 97 570 and then here's cash here's cash we're in H3 equals 3,180 bringing the cash down so that puts us back in balance so what happened cash goes down loan goes down but only by the amount of allocate to the loan interest goes up by whatever the interest is bringing net income down only by the amount of interest so net income doesn't go down by the payment only the amount of interest that the rest of it's just reducing the liability so this is the amount that we had to pay over and above that's why it's an expense in this time period in order to help generate revenue okay so that's this amount then of course matches where we are now on our amortization table now we're gonna do this one more time and note this would be a month later so obviously we wouldn't do it right after a month would pass our numbers would change based on whatever activity happened but we're just gonna use the same trial balance to get an idea of what's happening month to month this is a month later and we're gonna do this again so I'm gonna unhighlight this we're gonna make that blue again and we're focusing on the second payment we're gonna make that green right click and make it green so we'll do the same thing and if you if you're in practice you're probably gonna say well it should be the same as last month that's what the people always tell me to do just copy last month but you can't copy flat month last month exactly because the interest portion it's gonna change the amount of payment will remain the same so we can copy like the format we can say well cash is affected so I know that's gonna be the same as what we did last month so I'm gonna skip a line skip two more I'm in B9 put it on the bottom right click and paste 123 that's the same and the cash is gonna be a credit of this amount that's what they standardized when we make a loan that's what they want to standardize because they want us to make it as easy as possible you know when we're thinking about it but to do that they made this complicated the interest and principal portion so the interest then it's still going to be debited so we're gonna debit interest here but the amount will differ and that's the that's the part that won't be the same from time period the time period and we'll have to get that from the table by saying equals picking up in this case the 732 and then the difference will be the payment the note payable reduction so the note payable is the credit balance we're gonna make it go down and that's gonna be the difference between these 2004 48 that's what we need should also be what's on the amortization table so it equals this 2004 48 so that's what we have enough and again there's our journal entry these are being derived from the table so that's from there that's from there once we post it then this amount should be equal to this amount so let's do that we will say that here's the interest expense we're gonna record that here and again note this is a month later obviously you know we probably have our sales would have gone up and other expenses would have happened but the interest expense would be the second month it's the 750 if we're talking about a year income statement hasn't closed out to retain earnings yet so we'll double click on it say plus that 732 bringing the interest up bringing net income down and then we'll go to the note payable here's notes payable something's in it so I'm gonna double click on it go to the end of it plus point to that 2004 48 bringing it down and then here's cash here's cash we'll go to the middle double click end of it plus three thousand one eighty four bringing the cash down so now this amount here this 95 122 is matching this amount and that should be the case as we go through this we'll do this every time every month this amount will always tie out the interest amount of course after after the end of a time period if the month or the year will close out as all net income will to retain earnings or the capital whatever equity section depending on the type of entity we're using