---
title: "Journal entry for a convertible note"
description: "When a convertible note is issued, debit Cash and credit Convertible notes payable for the principal. At each period-end, debit Interest expense and credit Accrued interest for the interest earned so far. The note is debt until it converts or is repaid."
canonical: "https://lopifi.com/journal-entries/convertible-note"
---

# Journal entry for a convertible note

> When a convertible note is issued, debit Cash and credit Convertible notes payable for the principal. At each period-end, debit Interest expense and credit Accrued interest for the interest earned so far. The note is debt until it converts or is repaid.

Source: https://lopifi.com/journal-entries/convertible-note
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

---

- **Principal:** $250,000
- **Interest rate:** 6%
- **Interest accrued to year-end:** $12,575.34
- **Entity:** Illustrative company
- **Basis:** Accrual
- **Currency:** USD
- **Period:** 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.

### JE-1 · Transaction · March 1, 2026

Receive the cash and issue the note.

| Account | Debit | Credit |
| --- | ---: | ---: |
| 1000 Cash | $250,000.00 |  |
| 2800 Convertible notes payable |  | $250,000.00 |
| Total | $250,000.00 | $250,000.00 |

### JE-2 · Adjusting entry · December 31, 2026

Accrue the interest earned so far.

| Account | Debit | Credit |
| --- | ---: | ---: |
| 7000 Interest expense | $12,575.34 |  |
| 2120 Accrued interest |  | $12,575.34 |
| Total | $12,575.34 | $12,575.34 |

## 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 | $250,000.00 |  |
| 2120 Accrued interest |  | $12,575.34 |
| 2800 Convertible notes payable |  | $250,000.00 |
| 7000 Interest expense | $12,575.34 |  |
| Totals | $262,575.34 | $262,575.34 |

## 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

- [Convertible note](https://lopifi.com/md/glossary/convertible-note): Debt that converts into stock at a future financing, usually at a discount or a cap, accruing interest until it does — a liability until conversion, with any embedded conversion feature assessed for separate accounting
- [Valuation cap](https://lopifi.com/md/glossary/valuation-cap): The highest valuation a SAFE or note converts at. On YC's post-money SAFE the Safe Price is the cap ÷ Company Capitalization, and the holder takes whichever of that or the round price issues more shares
- [Liability](https://lopifi.com/md/glossary/liability): A present obligation of the entity to transfer an economic benefit (FASB CON 8 ¶E37)
- [Current liability](https://lopifi.com/md/glossary/current-liability): An obligation expected to be settled with current assets, or by creating another current liability, within twelve months or the operating cycle, if longer

## Work with this entry

- [Convertible note, explained for founders](https://lopifi.com/md/accounting/convertible-note): A 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 interest](https://lopifi.com/md/journal-entries/accrued-interest): At 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 stock](https://lopifi.com/md/journal-entries/issuing-common-stock): When 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 repayment](https://lopifi.com/md/journal-entries/loan-repayment): When 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.

*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](https://lopifi.com/md/tools/journal). General information, not tax, legal or accounting advice. Check with a CPA before you act on it.*