# 3 5 Notes Receivable Financial and Managerial Accounting

Although it may seem peculiar to record interest revenue on defaulted notes receivable, the Zoe Company is still obligated to pay both the interest and the principal. This is because not all the sales made to a particular customer are recorded in the customer’s subsidiary accounts receivable ledger. To determine the duration of the notes, both the dates of the notes and their maturity dates must be known. For example, a note dated 15 July with a maturity date of 15 September has a duration of 62 days, as shown below. There are several types of notes receivable that arise from different economic transactions. For example, trade notes receivable result from written obligations by a firm’s customers.

• In November 2014, Square announced that it would be accepting Apple Pay.
• In some cases, the note is received in one accounting period and collected in another.
• The transition from accounts receivable to notes receivable can occur when a customer misses a payment on a short-term credit line for products or services.
• For example, a note dated 15 July with a maturity date of 15 September has a duration of 62 days, as shown below.
• In contrast, notes receivable (an asset) is a more formal legal contract between the buyer and the company, which requires a specific payment amount at a predetermined future date.

In any event, the Notes Receivable account is at the face, or principal, of the note. No interest income is recorded at the date of the issue because no interest has yet been earned. Also, if customers are known to default on paying their accounts, the seller may insist that they sign a note for the balance.

## How to Calculate Interest Receivable & Interest Revenue for Notes Receivable

Since the note has matured, the holder or payee removes the note from Notes Receivable and records the amount due in Accounts 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. (a)”One year after date, I promise to pay…” When the maturity is expressed in years, the note matures on the same day of the same month as the date of the note in the year of maturity.

• But when you choose to do this, you are creating financial situations that require specific journal entries, including adjusting entries.
• When the borrower or maker of a note fails to make the required payment at maturity, the note is considered to have defaulted.
• A customer may give a note to a business for an amount due on an account receivable or for the sale of a large item such as a refrigerator.

When the payment on a note is received, Cash is debited, Note Receivables is credited, and Interest Revenue is credited. When a note is received from a customer, the Notes Receivable account is debited. The credit can be to Cash, Sales, or Accounts Receivable, depending on the transaction that gives rise to the note. So far, our discussion of receivables has focused solely on accounts receivable. Companies, however, can expand their business models to include more than one type of receivable. This receivable expansion allows a company to attract a more diverse clientele and increase asset potential to further grow the business.

## Unit 10: Receivables

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.

To show the initial recording of notes receivable, assume that on 1 July, the Fenton Company accepts a \$2,000, 12%, 4-month note receivable from the Zoe Company in settlement of an open account receivable. In accrual accounting, sales are recorded when they are made, regardless of the payment method. So, the initial journal entry for the sale of the above-mentioned furniture is a debit to Notes Receivable and a credit to Sales. This shows that the sale took place and the amount that is being financed. If it is still unable to collect, the company may consider selling the receivable to a collection agency.

## Types of Notes Receivable

For example, when the previously mentioned customer requested the \$2,000 loan on January 1, 2018, terms of repayment included a maturity date of 24 months. This means that the loan will mature in two years, and the principal and interest are due at that time. The following journal entries occur at the note’s established start date. When the maker of a promissory note fails to pay, the note is said to be dishonored.

Frequency of a year is the amount of time for the note and can be either days or months. We need the frequency of a year because the interest rate is an annual rate and we may not want interest for an entire year but just for the time period of the note. In some cases, the note is received in one accounting period and collected in another. The note has now been completely paid off, and ABC has recorded a total of \$246 in interest income over a three-month period. The accounts receivable is just as valid a claim as are the notes receivable, as well as the interest.