How should convertible note financing be handled on the balance sheet?

Kruze Consulting Startup Q&A Author
Vanessa Kruze Founder, CPA

A convertible note should be classified as a Long Term Liability that then converts to Equity as stipulated from the contract (usually a new fundraising round). The image should help…

Assuming that there’s a $3,027,000 note with $181,620 in total accrued interest, you’ll have the outstanding note as a liability, plus then you can add another line with the accrued interest. You could consolidate these for presentation purposes, but it’s often easiest to look at them broken out. 

Balance sheet liabilities equity

This link shows a balance sheet liabilities equity Series A, so you can see what it might look like as converted.

Remember, the balance sheet is trying to balance the assets against the liabilities + equity. So the cash coming in from your convertible note will generally equate to the liability that you add to the balance sheet. And, if your accounting is doing a good job, the accrued interest is a non-cash expense that flows through your income statement and impacts your accumulated net income in the equity section. 

**Note that SAFE notes are Equity right from the start

Also read: