This table shows a record of your loan of wheat to your neighbor. First, I'll explain the entries for You:

You

1. You accept a note from your neighbor promising to pay you 880 Bu of wheat in the future - 800 Bu to replace wheat borrowed and 80 Bu for interest. To record your use of the note, which consists of holding it until maturity, you debit your Note for Wheat account.
2. You then deliver 800 Bu of wheat to your neighbor. To record this part of the transaction you credit your Wheat account 800 Bu, reflecting the source of wheat - i.e. taking it from storage. You now have zero wheat.
3. Since you now have a note with more bushels of wheat payable than you delivered to your neighbor, you have 80 Bushels of unrealized interest. You record that interest as an Effect on Net Worth in a Balancing Entry, which I will explain later.

Your Neighbor records his side of the transaction with the following entries:

Your Neighbor

1. He gives you his note for 880 Bu of wheat he will repay in the future. Since this note provides him a source for the wheat which he borrows, he records that as a credit to his Note for Wheat account.
2. After he receives delivery of 800 Bu of wheat from you, he records that use for him (put in storage) as a debit to his Wheat account.
3. Because Your Neighbor gives you a note with 80 bushels more payable than he received, the transaction will cost him 80 bushels. He records that expense as an Effect on Net Worth (reducing his net worth) in a Balancing Entry.

I have included two items in this chart to demonstrate that the sources and uses balance. First, I have set up a T-account titled Balancing Entry, which I use to consolidate balancing entries that do not appear in the featured accounts. (To conserve web page space, I have featured only a few relevant accounts.) Second, I have included an item called Balancing Check. This row contains sums of the debit and credit entries in each column to assure that total debits equal total credits.

In later examples of economic transactions, I will use the same format used in this table. The examples will become more complex, but if you follow them in sequence, they should remain clear. Because I will add information progressively to these charts, I will highlight the current entries, in the same manner as I have done above.

Summary

 Your neighbor now has the 800 bushels of wheat, and you have zero bushels of wheat. You have a note receivable for 880 bushels of wheat (of that amount 80 bushels of wheat consists of interest, we'll discuss that later), and your neighbor has a note payable for 880 bushels of wheat.

Notice a couple of things:

Sources (credits) and uses (debits) for this transaction balance (equal).

The total amount of wheat neither increases nor decreases as a result of this transaction. (This point will become important later.)

This personal loan example serves two objectives:

1. It introduces the format I will use later to demonstrate economic transactions.
2. It serves as a reminder that all loan transactions (indeed all financial transactions) reflect the exchange of either producer or consumer goods. The money denominations commonly used only record the relationship of goods for goods exchanges using a medium of indirect exchange.

 

Now, let's take a closer look at interest.