Or, it may specify that interest will be due at certain points during the note’s duration (monthly, quarterly, semi-annually). Notes receivable are often used as collateral for loans and other forms of financing. For example, an individual or company may use their notes receivable as collateral for a mortgage loan to purchase a home or other real estate property.

When interest is due at the end of the note (24 months), the company may record the collection of the loan principal and the accumulated interest. The first set of entries show collection of principal, followed by collection of the interest. Interest on a note receivable is calculated by multiplying the principal balance of the note by the interest rate and by the number of days that have elapsed since the last interest payment was made divided by 365. The journal entry for interest on a note receivable is to debit the interest income account and credit the cash account.

Notes receivable are financial instruments that represent the debt owed by a debtor to the lender. The terms of notes receivable are such that they must be repaid by the borrower at some point in the future, typically within one year. The discount or premium resulting from the determination of present value in cash or noncash transactions is not an asset or liability separable from the note that gives rise to it. Therefore, the discount or premium shall be reported in the balance sheet as a direct deduction from or addition to the face amount of the note. Similarly, debt issuance costs related to note shall be reported in the balance sheet as a direct deduction from the face amount of that note.

Illustrated Examples of Notes Receivable

You should classify a note receivable in the balance sheet as a current asset if it is due within 12 months or as non-current (i.e., long-term) if it is due in more than 12 months. Notes receivable are treated as accounts receivable, which are listed on the balance sheet as assets. When an account receives payment, it is credited to the account and only then is it subsequently debited to Cash or Accounts Receivable.

The credit can be to Cash, Sales, or Accounts Receivable, depending on the transaction that gives rise to the note. 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. Interest on long‐term notes is calculated using the same formula that is used with short‐term notes, but unpaid interest is usually added to the principal to determine interest in subsequent years. For example, a two‐year, 10%, $10,000 note accrues $1,000 in interest during the first year.

Company A sells machinery to Company B for $300,000, with payment due within 30 days. 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. 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. On the other hand, the lender is the one who receives a promissory note to receive the interest and principal repayment. The lender records note as an asset of the business under-investment (line item).

When this occurs, the collection agency pays the company a fraction of the note’s value, and the company would write off any difference as a factoring (third-party debt collection) expense. Let’s say that our example company turned over the $2,200 accounts receivable to a collection agency on March 5, 2019 and received only $500 for its value. The difference between $2,200 and $500 of $1,700 is the factoring expense. Accounts receivables, however, are unsecured debts that don’t have any collateral backing them up. There are two main parties in the note receivable; these include the lender and borrower of the funds.


Any portion of the notes receivable that is not due within one year of the balance sheet date is reported as a long term asset. The debit impact of this transaction is a recording of the notes receivables in the books. This recording is top rated tax resolution firm due to receipt of a promissory note from the party and recorded in the books. On the flip side, the credit impact of this journal entry is the removal of the receivable balance as it has been provided in exchange for the promissory note.

Notes Receivable Journal entry

The principal of a note is the initial loan amount, not including interest, requested by the customer. If a customer approaches a lender, requesting $2,000, this amount is the principal. The date on which the security agreement is initially established is the issue date.

The amount of payment to be made, as listed in the terms of the note, is the principal. The difference between notes receivable and traditional loans is that banks do not make these loans directly to borrowers. Instead, they sell them to investors and institutions who purchase them as investments.

Payment of the Note

BWW agreed to lend the $250,000 purchase cost (sales price) to
Waterways under the following conditions. The conditions of the
note are that the principal amount is $250,000, the maturity date
on the note is 24 months, and the annual interest rate is 12%. When the maker of a promissory note fails to pay, the note is said to be dishonored. Assuming D. Brown dishonors the note but payment is expected, the company records the event by debiting accounts receivable from D. Brown for $2,625, crediting notes receivable for $2,500, and crediting interest revenue for $125. To illustrate notes receivable scenarios, let’s return to Billie’s Watercraft Warehouse (BWW) as the example.

Using our example, if the company was
unable to collect the $2,000 from the customer at the 12-month
maturity date, the following entry would occur. The accrued interest on notes receivable is recorded as a current asset in the balance sheet if it is expected that interest will be collected within one year. On the other hand, if the accrued interest on the note is not expected to be received in one year, it is reported as a long-term asset. Discount on notes receivable arises when the present value of the future cash flows (principal repayment + interest income) is less than the face value of the note receivable. In other words, if the PV of the future cash flow is less than the value of the notes receivable at the time of the agreement, the situation is said to create the discount on the notes receivables.

What is the journal entry for interest on a note receivable?

Interest Receivable decreasing (credit) reflects the 2018 interest
owed from the customer that is paid to the company at the end of
2019. The second possibility is one entry recognizing principal and
interest collection. Interest revenue from year one had already been recorded in 2018, but the interest revenue from 2019 is not recorded until the end of the note term. Thus, Interest Revenue is increasing (credit) by $200, the remaining revenue earned but not yet recognized. Interest Receivable decreasing (credit) reflects the 2018 interest owed from the customer that is paid to the company at the end of 2019. The second possibility is one entry recognizing principal and interest collection.

Notes receivable can convert to accounts receivable, as
illustrated, but accounts receivable can also convert to notes
receivable. 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. In this case, the
company could extend the payment period and require interest. Other notes receivable result from cash loans to employees, stockholders, customers, or others. The face value of a note is called the principal, which equals the initial amount of credit provided.

Notes receivable are amounts owed to the company by customers or others who have signed formal promissory notes in acknowledgment of their debts. Promissory notes strengthen a company’s legal claim against those who fail to pay as promised. The maturity date of a note determines whether it is placed with current assets or long‐term assets on the balance sheet. Notes that are due in one year or less are considered current assets, and notes that are due in more than one year are considered long‐term assets. Accounts receivable is recorded as current assets in the balance sheet.

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