Example of Recording an Asset that was Partially Financed
Assume that your company purchased a car for $10,000 by paying cash of $4,000 and signing a promissory note for $6,000.
The accounting entry is:
- Debit the asset account Automobiles for the cost of $10,000
- Credit the asset account Cash for the $4,000 that was paid
- Credit 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 should be recorded with a debit to Interest Expense and a credit to Cash or Interest Payable (if the interest was not paid). Any cash payments that exceed the amount of interest owed at the time of the payment should be debited to Notes Payable. The balance in the liability account Notes Payable should agree with the principal balance owed to the lender. The balance in the liability account Interest Payable should agree with the interest due as of that date.
You can call the 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.
