We do need an adjusting entry in this case, because three months has gone by and
we haven't gotten paid any interest, but we've earned interest revenue.
We've earned interest revenue because we provided the service
of having the money outstanding to the employee over the past three months.
We have a contract where we're eventually going to get paid.
So it meets both the earned and realized criteria.
So we're going to recognize the interest revenue.
We recognize revenue with a credit.
We credit interest revenue for 3,000.
The debit is again going to be a receivable and
we're going to be specific here and call it interest receivable.
Because the asset is that we're owed cash for interest.
We don't want to call this notes receivable because
we're only going to use that for the principal part.
And of course we don't want to call it accounts receivable because we only use
that for customers.
>> How did you come up with $3,000 as the amount of interest revenue?
>> Let me show you.
We have 100,000 of principle and a 12% interest rate.
Anytime you see an interest rate you should assume it's an annual rate
unless it specifies otherwise.
So 100,000 times 12% is 12,000 of interest per year.
But it hasn't been a year yet.
So we take 12,000 times 3 12ths because it's been three months.
And we end up with $3,000 of interest for the three months.