FAR THEORY
PAYABLES
ACCOUNTS PAYABLES NOTES PAYABLES
- payable arising from normal operation or ordinary NON-INTEREST-BEARING NP
course of business
• Interest ≠ 0 (Nominal rate is 0)
- measured at face value (NOT to be recorded at discounted • Interest = Excess of the FV over the PV
value) • Interest is in the TOTAL FV of note
- classified as current liability reported in the SFP
Face Value
ACCOUNTING FOR CASH DISCOUNTS Principal Interest
GROSS method NET method
PV of note DISCOUNT on NR
- Purchases/Sales *Cash Price *Unearned interest inc.
- Purchases/Sales recorded at NET Invoice *FV of note (interest upon amort.)
recorded at GROSS Price
Invoice Price (Gross Invoice price -
Cash discount) • FV of • Contra- account;
-Purchase/Sales Goods/Services/NCA Normal Bal. = DEBIT
Discount account -Purchase/Sales RECEIVED • Total interest to be
(Paid/Collected WITHIN Discount LOST account
• FV of Note/ amortized over the life
the discount period) (Paid/Collected BEYOND
PV OF FUTURE of the note
the discount period)
CASH OUTFLOWS
*if multiple cash discounts, choose the highest one
INTEREST-BEARING NR
Nominal rate – stated rate/ coupon rate/ contract rate
Effective rate – market rate / prevailing interest rate
FV (NOMINAL RATE = EFFECTIVE RATE)
• FV of note = PV of note
• No Discount/Premium
PV (NOMINAL RATE ≠ EFFECTIVE RATE)
• Premium – adjunct account: DEBIT
Nominal > Effective
PV > FV
• Discount – contra account; CREDIT
Nominal < Effective
PV < FV