 A long-term note payable is also a very common way for companies to finance operations and growth. A long-term note payable is a contract between a lender, a bank, for example, and a borrower, let's say a company. The lender lends cash to the company. We call this the principal amount. The company agrees to repay the principal plus interest at some point in the future as detailed in the loan contract. There are a lot of different types of loans, but I want to introduce you to the three most common types for long-term business loans. They are an installment note, a balloon payment note, and a mortgage. Many of you might be familiar with the concept of an installment loan. If you've ever taken out a loan that requires regular monthly payments, chances are it was an installment loan. A common characteristic is that the monthly payment amount is fixed. Additionally, a portion of the payment goes to pay for the accrued interest and the remainder to reduce the principal amount. This continues month after month until the loan has been paid off. A balloon loan isn't very common for individuals, but it is for businesses, especially large businesses with access to a lot of cash. A common characteristic is that no monthly payment is required. Payments for both accrued interest and principal are due at the end of the loan term. An example might be a company that is starting a new product line, and they may want to repay a loan several years after the product line has been established and quite profitable. A mortgage is a type of installment loan that is secured by real property, meaning land or building. I want to mention this one because business loans are secured differently than loans for individuals. Large organizations often provide no specific security for long-term notes. Small organizations might be required to list all of the business assets, and possibly the owner's assets, too, in order to secure a loan. Let's wrap up this topic with an example. On July 1, Joy Division signed a 24-month promissory note to borrow $11,000 plus 6% annual interest. They will make a monthly loan payment of $500 beginning August 1. So what is the journal entry to record the long-term notes payable? As you can see, it is a debit to cash and a credit to long-term notes payable for $11,000. In order to easily make the journal entry to record the monthly loan payment, companies prepare an amortization schedule. I've shortened this one to fit onto the screen, but it would show each month until the loan balance is zero. You might recall that interest is calculated by taking principal times the interest rate times time. In this example, that's how the interest column amounts are calculated. The principal reduction is the difference between the payment amount and the amount of interest expense. We can use the amortization table to find the data needed to record the journal entry for the monthly loan payment. We need the payment amount, the amount of interest expense, and the amount the notes payable is reduced. Using the information from the table, we debit interest expense for $55, debit long-term notes payable for $445, this is how we reduce the liability, and we credit cash for $500. We could just as easily record a journal entry on November 1. You can see the highlighted data on the amortization table. So now we debit interest expense for $48, debit long-term notes payable for $452, and credit cash for $500.