 In this presentation, we will enter adjusting entries related to notes, payable and interest. We will enter that journal entry in the general journal on the left and post it to the worksheet on the right, the worksheet in order, assets in green, liabilities in orange, equity in light blue, revenue and expenses in dark blue we are in balance, debits equaling the credits indicated by the green zero, currently have net income of 700,000, revenue minus expenses and on the side of course after this adjustment we've got the 690,460. What we're trying to show here is the idea that if someone didn't have the amortization table for the recording of the payments of a loan, they could have two options. For example here's our loan, we've got the $100,000 loan, the interest rate is 9% and there's 36 payments on the loan, so our payment amount is 3,180. Now often times we don't have the amortization table unless we create it, so if we're working with someone that didn't have the amortization table or we didn't have the amortization table or if we wanted to set up a system to make the recording of the payment as easy as possible, our options would be well we know when we make a payment we're going to credit cash for this amount, we could debit either the note payable or we could debit interest expense. Now if we were to set up a system to make it as easy as possible for someone entering the data without having to do anything much else, make it the payment all the same every time so all they have to do is write a check and the system will just record the same payment, then we would want to record it probably to notes payable preferably and what that would do is it means even if they had the amortization table they would have to break out interest and principal in different proportions with each payment because that's how it works, so we can't standardize each payment each month then as easily. So what we could do is say hey just every time you make a payment just make a payment and it'll go to notes payable and then we'll fix it periodically, that would be an adjusting entry part of the system, they may just post it to wherever they end up posting it and we have to go fix it, so it's possible that they make a payment and then the other side goes to notes payable but it's also possible that they make these payments and they just record the other side to interest expense as if it's all interest expense and none of it was principal, so that's the other option so that's what we're gonna assume here if we look at what happened we say hmm okay well the note was on the books for a hundred thousand the detail shows interest expense and like the GL the data shows that they made these three entries debiting interest expense and crediting cash that's what's happened so far and what should have happened of course if it was you know perfectly done is they should have done according to this amortization table breaking out the interest expense and these proportions the payment interest and principal and these proportions and that would lead us to an ending balance in the note payable of 92 655 whereas we have 100 thousand here so what we're gonna do is just fix this now so obviously what happened is the interest is too high because it should be this plus this plus this for three payments or two thousand one ninety five and it's at nine thousand five forty because all of the principal was applied to it so our adjusting entry then is to bring this to our payment after those three payments ninety two six fifty five and bring this to the proper interest which will be this plus this plus this or two thousand one ninety five so to do that we're gonna say okay well the this note needs to be going down because we need to bring it down to this 92 something it's got a credit in it so we're gonna do the opposite thing to it we'll debit the note so I'm gonna right click and copy the note payable we'll put that up top in B12 right click in paste one two three now the journal entry we get or the amount will be 100 thousand minus what we want it to be which is this 92 655 and that's gonna be our adjustment that we're gonna have here then we're gonna credit the same amount which is also the amount of course that we need this to go down by in other words with the interest should be this 750 plus the 732 plus the 713 or two thousand one ninety five so it should be two thousand one ninety five and minus the 9540 that's there it should go down by 7,000 345 so it's at a debit we're gonna do the opposite to make it go down credited to what it should be will copy interest expense I'm gonna put that on the bottom in B13 right click and paste one two three gonna indent home tab alignment increase indenting and then we'll post this out and see if it does what we think it should what do we think it should do we think this amount should be here and this amount should go down to that two thousand one ninety five so we'll post the note payable here's the note payable here's the note payable we're in the middle column H6 equals we'll point to that 7,000 345 bringing it down to the 92 655 and then the other side is going to be the interest expense here's interest expense something's in it so we'll double click on it go to the end of it plus and point to that 7,000 345 and entered so that puts us back in balance puts this interest amount to the sum of these three numbers 2,195 and of course that affects net income bringing that income down so what we what was done originally is it was all put into expense increase the expenses by too much because some of it was principal lowering income by too much so we lowered the expense which increased net income and then we brought down the portion that was related to the principal now matching what's in the amortization schedule