 In this discussion, we will discuss the discussion question of describe the characteristics of an installment note Support accounting instruction by clicking the link below giving you a free month 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 than 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 So if we see a discussion question or essay question like this, we're talking about an installment note So first we may want to define what a note is we may not know Installment note we may think well, how am I going to get started here? Well at first we can define a note if we're talking about an installment note Then the note will probably be some form of it and probably that could be picking up some points So when we're taking a note, we're basically talking about a loan This is gonna be a note payable that we're gonna have here So a note is gonna be some type of promise to pay so when we take a loan typically out from the bank What we're trying to do is finance the company. So we're looking to get money for taking out a hundred thousand dollar loan We're gonna get the hundred thousand cash and we're gonna credit the note payable And we're typically gonna have some type of contract then requiring the promise of the repayment of the note along with interest Now that's gonna be the typical agreement of course to get a loan We're gonna get the loan. We're gonna sign a promise. We're gonna pay back both the principal and the interest Now when we think about an installment note the difference is it's really what we think about normally when we think about a note Because most of us have dealt with installment notes And that's gonna be something like a car payment It's typically an installment note if we have to pay back a loan for the purchase of a car or a mortgage Typically it's gonna be some type of installment note and that usually will be the case that we're gonna pay back some Fixed payments in the future and oftentimes those fixed payments will be the same in a mouth And notice that we could do other things with a note a note could be anything We could set up the note in whatever form we want meaning we could say We're gonna we're gonna take a loan a hundred thousand from the bank right now And we're gonna pay it all back at the end meaning we're paid both the interest and The principal at the end of the note or we may set it up so that we just pay interest like the rent on the money And then pay back the principal at the end we can set up the note any any way we want to do it But oftentimes a note is set up in an installment form for multiple reasons One is that as you know the people that are that are receiving the note the people that are paying back Often want to know just just to the payments that will be made so they can budget Monthly payments. It's easier budget monthly payments often times then then just paint it all back in the end possibly Or it's it's also the case where the the loaner the person loaning the money may want Installment notes because then they feel security in terms of the payments are still happening They can judge whether or not they believe that the people they're loaning to will be able to pay a certain dollar amount So it's more safe in some in some ways to have the installment So for that reason and and plus it's something that people are typically more used to we've seen that format more often With a lot of types of loans so a lot of loans will be in that format then and So what that means most of the time is most of the notes we have are going to be an installment note And that just basically means we're going to be paying back Interest and principal some type of installment payments to pay back the loan So if we took out a hundred thousand dollar loan We're going to be paying back some type of payments typically those payments being even Now if we want to get into that so that would be the installment note Now we could get into more detail in terms of what it means to pay back just to pick up as many points as possible And what's going to be the allocation? What does it mean to pay back principal and interest during the payments? And what does that do and that and to do that we discuss more of like an amortization table? What's actually happening when we get the installment note? Obviously, it's just a straight journal entry We would we would debit cash we increase cash and we would credit the liability the note payable on the books And then we're going to make payments and those payments are all going to be the same dollar amount of payment Now we fixed the dollar amount so that you know We can budget the dollar amount and for all the reasons we talked about but in order to fix the dollar amount to make a fixed payment We have to vary the amount of interest and principal that we're going to pay throughout the time period Meaning as we make the fixed payments, we're going to reduce the principal and as we reduce the principal We're going to be allocating a Different amount between interest and principal because the interest we owe is based on the principal that we owe So what happens in an installment note the confusing thing about? Normal installment notes where we pay the same payment all the time is that although the payments the same the amount allocated between interest and principal will differ and what will happen is that at the beginning of the installment note The same payment will be going a lot more to interest expense than principal portion Because the value of the note is higher I mean the face amount the carrying amount of the note is higher as the principal portion of the note goes down Then the amount allocated to principal of each payment Will go down and the amount that reduces the principal reduces the loan will go up And you can see this in any kind of if you take a loan for a car loan or if you have a mortgage loan You can see at the beginning of the amortization table You're like wow it's all interest right now And at the end of it you're going to be saying wow that's a lot of it We're paying almost all principal out and that's because of the way the note is set up as the results of us trying to make The payments the same and and having to adjust then the amount allocated between interest and principal along the life of the note