Title | Notes-receivable-pr e116d7a8a1b4e2a7972a39e89ac733a7 |
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Course | accounting |
Institution | University of Caloocan City |
Pages | 5 |
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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
A note receivable is also known as a promissory note. When the note is due within less than a year, it is considered a current asset on the balance sheet of the company the note is owed to. If its due date is more than a year in the future, it is considered a non-current asset. The interest income on notes receivable is recognized on the income statement. Therefore, when payment is made on a note receivable, both the balance sheet and the income statement are affected.
Key Components of Notes Receivable Herearethekeycomponentsofnotesreceivable:
Principal value:Thefacevalueofthenote Maker: Thepersonwhomakesthenoteandthereforepromisestopaythenote’sholder.Toa maker,thenoteisclassifiedasanotepayable. Payee:Thepersonwhoholdsthenoteandthereforeisduetoreceivepaymentfromthemaker. Toapayee,thenoteisclassifiedasanotereceivable Stated interest:Anotereceivablegenerallyincludesapredeterminedinterestrate;themaker ofthenoteisobligatedtopaytheinterestamountdue,inadditiontotheprincipalamount,at thesametimethattheypaytheprincipalamount. Timeframe:Thelengthoftimeduringwhichthenoteistoberepaid.Notesreceivablearenot usuallysubjecttoprepaymentpenalties,sothemakerofthenoteisfreetopayoffthenoteon orbeforethenote’sstateddue,ormaturity,date.
Example ofNotes Receivable CompanyAsellsmachinerytoCompanyBfor$300,000,withpaymentduewithin30days. After45daysofnonpaymentbyCompanyB,bothpartiesagreethatCompanyBwillissuea notepayablefortheprincipalamountof$300,000,ataninterestrateof10%,andwithapayment
of$100,000plusinterestdueattheendofeachmonthforthenextthreemonths.Alternatively, thenotemaystatethatthetotalamountofinterestdueistobepaidalongwiththethirdandfinal principalpaymentof$100,000. Inthisexample,CompanyArecordsanotesreceivableentryonitsbalancesheet,while CompanyBrecordsanotespayableentryonitsbalancesheet.Theprincipalvalueis$300,000, $100,000ofwhichistobepaidmonthly.Inaddition,theagreeduponinterestrateonthenoteis 10%. Example ofJournal Entries for Notes Receivable Stillusingtheexampledelineatedabove,withcompaniesAandB: Anotereceivableof$300,000,dueinthenext3months,withpaymentsof$100,000attheend ofeachmonth,andaninterestrateof10%,isrecordedforCompanyA. TheproperjournalentriesforCompanyAareasfollows:
Attheendofthefirstmonth,CompanyBpays$100,000aswellasaninterestpayment= $2,465.75(calculatedas$300,000x10%x30/365days=$2,465.75).
Attheendofthesecondmonth,CompanyBpays$100,000,alongwithinterestof$200,000x 10%x30/365days=$1,643.84.Notethattheamountofinterestislowerbecausethe outstandingprincipalamountisnowonly$200,000($300,000–$100,000),havingbeenreduced bythepreviousmonth’spayment.
Attheendofthethirdandfinalmonth,CompanyBpaystheremainingprincipalof$100,000,as wellastheinterestof$100,000x10%x30/365days=$821.92
Attheendofthethreemonths,thenote,withinterest,iscompletelypaidoff. Notes Receivable vs Notes Payable ItisnotunusualforacompanytohavebothaNotesReceivableandaNotesPayableaccounton theirstatementoffinancialposition.NotesPayableisaliabilityasitrecordsthevalueabusiness owesinpromissorynotes.NotesReceivableareanassetastheyrecordthevaluethatabusiness isowedinpromissorynotes.Acloselyrelatedtopicisthatofaccountsreceivablevs.accounts payable. Additional Resources ThankyouforreadingourguidetoNotesReceivable.CFI’smissionistohelpanyoneinthe worldbecomeaworld-classfinancialanalystthroughcompletingtheCFIFinancialModeling& ValuationAnalystcredentialprogram.Tocontinuelearningandadvancingyourcareerin corporatefinance,youmayfindtheadditionalfreeCFIresourcesbelowhelpful:
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