To illustrate, let's assume that Local Retailer borrows $20,000 from its bank and signs a promissory note. Local Retailer records $20,000 in its liability account Notes Payable and also records the $20,000 in its Cash account. The bank records the $20,000 promissory note in its asset account Notes Receivable and it records the $20,000 increase in its customer's checking account (which is a liability account on the bank's balance sheet).
Since the promissory note is a contract to pay interest at a specified date, it requires Local Retailer to report interest expense in each accounting period and to report interest payable for any interest owed at the end of an accounting period. The bank is required to report interest revenue in each accounting period and to report interest receivable for any interest it has earned but has not received as of the end of each accounting period.
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