Journal entry for a convertible note
Illustrative company · Accrual basis · USD · March – December 2026
The worked example
On March 1, 2026 the company issues a $250,000 convertible note at 6% simple interest. At December 31, 2026 it has accrued 306 days of interest on an actual/365 basis: $12,575.34, none of it paid.
Transaction · March 1, 2026
JE-1 1 Mar 2026 Manual posted
Receive the cash and issue the note.
Read-onlyBalanced
Adjusting entry · December 31, 2026
JE-2 31 Dec 2026 Adjusting posted
Accrue the interest earned so far.
Read-onlyBalanced
What the entries do to the accounts
Every entry above posted to the ledger, starting from zero balances: the net debit or credit each account is left with. Debits equal credits, so the books still balance.
| Account | Debit | Credit |
|---|---|---|
| 1000 Cash | 250,000 US Dollar | |
| 2120 Accrued interest | 12,575 US Dollar and 34 cents | |
| 2800 Convertible notes payable | 250,000 US Dollar | |
| 7000 Interest expense | 12,575 US Dollar and 34 cents | |
| Totals | 262,575 US Dollar and 34 cents | 262,575 US Dollar and 34 cents |
Why it is booked this way
Until it converts, a convertible note is a loan. The company received cash and owes it back with interest unless the investor chooses, or a qualifying round triggers, conversion into shares. So the cash raised is a liability and interest accrues on it, not equity.
Interest on most notes is simple and accrues daily. Booking it each period-end keeps the liability and the expense right while no cash moves, and the accrued interest is part of what converts later.
The terms matter more than the entry. A discount, a cap or a settlement feature can change how the note is accounted for, which is why the first note a company issues deserves a CPA's read.
Common mistakes
- Booking the investment as equity on the day the money arrives, before the note has converted into anything.
- Not accruing interest because no cash is paid, so the liability and the expense are both understated.
- Ignoring the note's discount or cap when the terms may need separate accounting.
Questions
- Where does a convertible note go on the balance sheet?
- Usually as a liability: the company owes the money back unless the note converts. It sits under debt, current when it matures within twelve months of the balance sheet date.
- Do we accrue interest on a convertible note?
- Yes. Most notes carry simple interest that accrues until conversion or maturity, and each period's share is an expense even though nothing is paid. On conversion, the accrued interest typically converts with the principal.
- Is the entry always this simple?
- Not necessarily. Discounts, caps and other features can require separate accounting, for example under ASC 470-20 or ASC 815. This page shows the basic issuance and interest; have your CPA review the note's terms.
Terms on this page
The lessons that teach this
From the free founder back-office course: each lesson is taught on one company's books, with the authority behind every rule.
- Ways to raise: SAFEs, notes, priced rounds, debt and grants › The convertible noteDebt that becomes stock: interest, maturity, cap and discount — the same $250,000 as a note instead of a SAFE.6 min
- SAFE conversion and dilution, worked end to end › SAFE versus note at conversionThe same money and cap as a SAFE and as a note, converted at Northwind's Seed.4 min
- Equity on the books: stock, SAFEs, notes and stock compThe entries behind every raise: stock at par and APIC, a SAFE as a liability and its conversion, a note's interest, and stock-based compensation — in Northwind's cents.10 min
Work with this entry
The tool that computes the schedule, the concept behind it, the entries that come next and the components that render them.
- Convertible note, explained for foundersA convertible note is investor debt that converts into shares at your next priced round. Unlike a SAFE it accrues interest and has a maturity date.
- Journal entry for accrued interestAt month-end, debit Interest expense and credit Accrued interest for the interest earned by the lender since the last payment. When the payment is made, debit Accrued interest and credit Cash.
- Journal entry for issuing common stockWhen shares are issued for cash, debit Cash for the proceeds, credit Common stock for the par value of the shares, and credit Additional paid-in capital for everything above par.
- Journal entry for a loan repaymentWhen the loan is received, debit Cash and credit Loan payable. Each payment debits Interest expense for the interest portion and Loan payable for the principal portion, and credits Cash for the full payment.
- JournalEntryDebit and credit as two columns. No signed-column variant.
- TransactionDetailFull detail sheet with attachments and audit trail.
An illustrative company, not anyone’s real books. Every figure on this page is computed from the inputs in the example and posted by the same functions as the journal entry balancer. General information, not tax, legal or accounting advice. Check with a CPA before you act on it.