Final answer:
The initial borrowing of cash by issuing a promissory note is recorded as a debit to Cash and a credit to Notes Payable. Interest Expense is not involved in this initial transaction. Borrowing allows a company to increase its assets while creating a liability that commits to future repayments.
Step-by-step explanation:
The entry to record the initial borrowing of cash by issuing a promissory note will include a debit to Cash and a credit to Notes Payable. When a company borrows funds from a bank or through issuing bonds, it increases its cash on hand, which reflects as an asset on the balance sheet. This cash infusion is recorded as a debit because it represents an increase in the company's assets.
On the other hand, the credit entry to Notes Payable indicates a liability created by the borrowing, which the company is obliged to repay in the future. This liability is recorded as a credit because it represents an increase in the company's obligations. Interest expense is not included at this initial stage but will be recorded later as the company incurs interest over time on the amount borrowed.
Companies choose to borrow money through banks or bonds as a way to maintain control over their operations without diluting ownership through issuing stock. Loans and bonds also commit the company to scheduled interest payments, creating a fixed financial obligation irrespective of the company’s income situation.