10 6: Accounting for Notes Receivable Business LibreTexts

For a note that crosses accounting periods (months or years), interest is recorded as it is earned using an account called Interest Receivable. Accounts receivables, however, are unsecured debts that don’t have any collateral backing them up. For example, if a business wants to borrow $7,000, Square might charge a total of $7,910 for the loan. Upon approval, the $7,000 is deposited into the business’s checking account the next day and then Square charges 9% of the business’s credit card sales each day until the $7,910 is fully paid.

Regardless of the entity’s procedures, the figure tends to worsen as financial conditions worsen in the general economy. Alternatively, it can simply calculate the net receivables by applying the estimated collection rate for each range. The concept behind an aging schedule is to apply different collectibility rates to different receivables based on age.

Accounting for Notes Receivable

The $18,675 paid by Price to Cooper is called the maturity value of the note. Maturity value is the amount that the company (maker) must pay on a note on its maturity date; typically, it includes principal and accrued interest, if any. Note that in this calculation we expressed the time period as a fraction of a 360-day year because the interest rate is an annual rate and the note life was days. If the note life was months, we would divide by 12 months for a year. Accounts receivable are an important aspect of a business’s fundamental analysis. Accounts receivable are a current asset, so it measures a company’s liquidity or ability to cover short-term obligations without additional cash flows.

Liquidity is defined as the ability to generate sufficient current assets to pay current liabilities, such as accounts payable and payroll liabilities. If you can’t generate enough current assets, you may need to borrow money to fund your business operations. These loans are typically short term, due to be repaid to the business within one year.

Notes Payable on a Balance Sheet

The note may specify that the interest is due at the maturity of the note. Or, it may specify that interest will be due at certain points during the note’s duration (monthly, quarterly, semi-annually). If you want to simplify your business finances and manage your accounting processes with ease, then be sure to check out LiveFlow. LiveFlow has easy-to-use templates which can save you time and the platform offers numerous tools that can help you automate even the most complex financial accounting processes. Notes receivable are often used as collateral for loans and other forms of financing.

No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Intuit Inc. does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit Inc. does not warrant that the material contained herein will continue to be accurate nor that it is completely free of errors when published. The accrual basis posts revenue when it’s earned, and expenses are posted when they’re incurred.

Notes Receivable

But, briefly, if a bank is loaning cash (the bank’s Note Receivable) to a customer (the customer’s Note Payable), the credit would be to Cash for the bank. If a company is selling to its customer and issuing a Note Receivable rather than an Accounts Receivable, a Revenue account would be credited to record the revenue. This schedule groups receivables by outstanding payment date ranges. The aging schedule may calculate the uncollectible receivables by applying various default rates to each outstanding date range. John signs the note and agrees to pay Michelle $100,000 six months later (January 1 through June 30). Additionally, John also agrees to pay Michelle a 15% interest rate every 2 months.

If the note life was months, we would divide by 12 months for a year. The note has now been completely paid off, and ABC has recorded a total of $246 in interest income over a three-month period. When a note’s due date is expressed in days, the specified number of days is divided by 360 or 365 in the interest calculation. In current practice, however, financial institutions and other companies generally use a 365‐day year to calculate interest. Therefore, you should be prepared to calculate interest either way.

Notes Receivable vs Notes Payable

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. It is possible to combine the previous two entries by debiting Notes Receivable and crediting Sales. Together, the principal and interest portions represent the note’s maturity value.

A grocery store or restaurant serves customers who pay by debit card or credit card immediately. Businesses that sell “big-ticket items”, such as airplanes, may not receive payment for months. To assess your performance, compare your turnover ratio to other firms in your industry.

This can make bookkeeping cumbersome, especially for companies that hold multiple notes receivable. When a company owes debts to its suppliers accountant for freelancers or other parties, these are accounts payable. To illustrate, imagine Company A cleans Company B’s carpets and sends a bill for the services.

• 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.
• In other cases, a customer’s credit rating may cause the seller to insist on a written note rather than relying on an open account.
• Notes payable are written agreements (promissory notes) in which one party agrees to pay the other party a certain amount of cash.
• We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources.
• Notes Receivable are a type of receivable that earns the company interest revenue.
• Interest Receivable is an Asset account so it has a normal debit balance.