Written promissory notes that give the holder the right to receive the amount outlined in an agreement Show
What are Notes Receivable?Notes receivable are a balance sheet item that records the value of promissory notes that a business is owed and should receive payment for. A written promissory note gives the holder, or bearer, the right to receive the amount outlined in the legal agreement. Promissory notes are a written promise to pay cash to another party on or before a specified future date. If the note receivable is due within a year, then it is treated as a current asset on the balance sheet. If it is not due until a date that is more than one year in the future, then it is treated as a non-current asset on the balance sheet. Often, a business will allow customers to convert their overdue accounts (the business’ accounts receivable) into notes receivable. By doing so, the debtor typically benefits by having more time to pay. Summary
Key Components of Notes ReceivableHere are the key components of notes receivable:
Example of Notes ReceivableCompany A sells machinery to Company B for $300,000, with payment due within 30 days. After 45 days of nonpayment by Company B, both parties agree that Company B will issue a note payable for the principal amount of $300,000, at an interest rate of 10%, and with a payment of $100,000 plus interest due at the end of each month for the next three months. Alternatively, the note may state that the total amount of interest due is to be paid along with the third and final principal payment of $100,000. In this example, Company A records a notes receivable entry on its balance sheet, while Company B records a notes payable entry on its balance sheet. The principal value is $300,000, $100,000 of which is to be paid monthly. In addition, the agreed upon interest rate on the note is 10%. Example of Journal Entries for Notes ReceivableStill using the example delineated above, with companies A and B: A note receivable of $300,000, due in the next 3 months, with payments of $100,000 at the end of each month, and an interest rate of 10%, is recorded for Company A. The proper journal entries for Company A are as follows: At the end of the first month, Company B pays $100,000 as well as an interest payment = $2,465.75 (calculated as $300,000 x 10% x 30 / 365 days = $2,465.75). At the end of the second month, Company B pays $100,000, along with interest of $200,000 x 10% x 30 / 365 days = $1,643.84. Note that the amount of interest is lower because the outstanding principal amount is now only $200,000 ($300,000 – $100,000), having been reduced by the previous month’s payment. At the end of the third and final month, Company B pays the remaining principal of $100,000, as well as the interest of $100,000 x 10% x 30 / 365 days = $821.92 At the end of the three months, the note, with interest, is completely paid off. Notes Receivable vs Notes PayableIt is not unusual for a company to have both a Notes Receivable and a Notes Payable account on their statement of financial position. Notes Payable is a liability as it records the value a business owes in promissory notes. Notes Receivable are an asset as they record the value that a business is owed in promissory notes. A closely related topic is that of accounts receivable vs. accounts payable. Additional ResourcesThank you for reading our guide to Notes Receivable. To continue learning and advancing your career in corporate finance, you may find the additional free CFI resources below helpful:
When a note is received from a customer on account it is recorded?When a note is received from a customer on account, it is recorded by debiting Accounts Receivable and crediting Notes Receivable. note receivable. The discounting of a note receivable creates a contingent liability that continues in effect until the due date of the note.
What is the journal entry for notes receivable?The journal entry for interest on a note receivable is to debit the interest income account and credit the cash account.
What is the journal entry to record receiving cash from customers on account?The amount is credited to the accounts receivable account of the customer to record the fact that the cash has been received from them.
Which is the journal entry to record a payment on account?Accounts payable entry. When recording an account payable, debit the asset or expense account to which a purchase relates and credit the accounts payable account. When an account payable is paid, debit accounts payable and credit cash.
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