Let's assume that your company purchased a car for $10,000 and paid cash of $4,000 and signed a promissory note for $6,000. The accounting entry is a debit to the asset account Automobiles for the cost of $10,000; a credit to the asset account Cash for the $4,000 paid; and a credit to the liability account Notes Payable for $6,000.

The liability account Notes Payable reports the principal amount owed at the time. Interest that will occur in the future is not recorded at the time of the purchase. The reason is that the interest is not owed as of that date. Each month, one month's interest on the note or loan will be recorded with a debit to Interest Expense and a credit to Cash or Interest Payable (if not paid). Any cash payments that exceed the amount of interest owed at that time will be debited to Notes Payable. The balance in the liability account Notes Payable should agree with the principal balance owed to lender. The balance in the liability account Interest Payable should agree with the interest due as of that date.

You can call your lender to verify the amount of principal and interest owed at a specific date and then compare the amounts to the balances in your general ledger accounts.

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