Page 50 - Account for Ag - 2019

9-2 Accounting for Agriculture CH 9]

bearing. In such cases, however, interest may be charged at the legal rate for any time that the note remains
unpaid after it is due. The interest that a business is obliged to pay is an expense and is called interest expense.
The interest that a business is entitled to receive is an income and is called interest income.

DIFFERENCE BETWEEN CHECKS AND NOTES

While the check constitutes an order (usually to a bank) to pay a certain sum of money to someone else; the
promissory note is a promise to pay to a person or persons or organization a certain sum of money, possibly with
interest. Notes are also made payable "to the order of" someone, so that they, too, may be negotiated simply by
endorsing them as is done with checks.

MATURITY DATE OF NOTES

The MATURITY DATE of a note is the date on which a note is due and payable. When a note is payable
in a certain number of months, the note is due the preceding day in the month of maturity. Thus, a 6 months note
dated Jan. 12 is due and payable on July 11th. This is calculated by taking the numerical value of the first month
(January being month 1) and adding to that value the number of months of the note (6 months) to arrive at the
numerical value of the due month ( 1 + 6 =) 7, then converting that numerical value to the month; July being the
7th month in the calendar.

Determining due date. If the note is expressed in terms of days, not months, the date of maturity is found
by counting the actual number of days from date of the note. The due date may be determined in the following
manner:

(1) Subtract the date of the note from the number of days in the month in which it is dated.
(2) Add as many full months as possible without exceeding the number of days in the note, counting
the full number of days in these months.
(3) Subtract the total days obtained in (1) and (2) from the number of days in the note.

As an example, here is the calculation of the maturity date of a 90-day note dated March 16:
First determine the month the note will be due: March is the 3rd calendar month; 90 days is three months;
3+3=6, therefore the note will be due in June (the 6th calendar month). Then as follows:

Term of the note ............................................. 90
March (days) ............................................. 31
Date of note ............................................. 16
Reminder ............................................. 15
April (days) ............................................. 30
May (days) ............................................. 31
Total ............................................. 76
Due date, June ............................................. 14

When the term of a note is expressed as a specified number of months after the issuance date, the due date is
determined by counting the number of months from the issuance date. Thus, a 3-month note dated June 5 would
be due on September 5. In those cases in which there is no date in the month of maturity that corresponds to the
issuance date, the due date becomes the last day of the month. for example, a 2-month note dated July 31 would
be due on September 30.

When the term of a note is expressed in month, each month may be considered as being 1/12 of a year, or as
an alternative, the actual number of days in the term may be counted. For example, the interest on a 3-month note
dated June 1 could be calculated on the basis of 3/12 of a year or on the basis of 92/360 of a year. Obviously the
interest calculated for each of these methods will be slightly different in amount. It is the usual commercial
practice to employ the first method, while banks usually charge interest for the exact number of days. For the
sake of uniformity, the commercial practice will be followed here.

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