Definition of Interest on a Note Payable
The interest on a note payable is reported on the income statement as Interest Expense. Usually this means the amount incurred (not the amount paid) under the accrual basis of accounting.
Reporting Interest on a Note Payable on the Cash Flow Statement
The interest paid on a note payable is reported in the section of the cash flow statement entitled cash flows from operating activities.
Since most corporations report the cash flows from operating activities by using the indirect method, the interest expense will be included in the company’s net income or net earnings. The interest expense is adjusted to a cash amount through the changes to the working capital amounts, which are also reported as part of the cash flows from operating activities. In addition, the actual amount of interest paid must be disclosed.
If a corporation prepares its cash flow statement using the direct method, the amount of interest paid should appear as a separate line in cash flows from operating activities.
[The cash payments and cash receipts of principal on a note payable are reported in the financing activities section of the cash flow statement.]
