Notes Receivable
Module 3:
Cash, Receivables, Payables
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Define notes receivable.
➛ Distinguish between accounts receivable and notes receivable.
➛ Identify key elements of a promissory note.
➛ Calculate interest on notes receivable.
➛ Record journal entries for notes receivable transactions.
Key Vocabulary
➛ Notes Receivable
➛ Promissory Note
➛ Maker
➛ Payee
➛ Principal
➛ Interest
➛ Maturity Date
➛ Term
What Are Notes Receivable?
Notes receivable are
➛ Formal, written credit instruments
➛ Usually interest-bearing
➛ More secure than accounts receivable
They are classified as current or non-current assets, depending on maturity.
Notes Receivable vs Accounts Receivable
Accounts Receivable
Informal agreement
Usually no interest
Short-term
Higher risk
Informal agreement
Usually no interest
Short-term
Higher risk
Notes Receivable
Formal written agreement
Often interest-bearing
Can be short or long-term
Lower risk
Formal written agreement
Often interest-bearing
Can be short or long-term
Lower risk
Key Elements of a Promissory Note
➛ Principal
➛ Interest rate
➛ Term
➛ Maturity date
➛ Maker and payee
Interest Calculation Formula
Interest = Principal × Rate × Time
Time is expressed in years
Journal Entries for Notes Receivable
When note is received
➛ Dr Notes Receivable
➛ Cr Accounts Receivable / Sales Revenue
When interest is earned
➛ Dr Interest Receivable / Cash
➛ Cr Interest Revenue
At maturity | collection
➛ Dr Cash
➛ Cr Notes Receivable
➛ Cr Interest Revenue
Identify the Instrument
State whether each transaction creates
Accounts Receivable | Notes Receivable
➛ Customer signs a 90-day promissory note.
➛ Customer promises verbally to pay later.
➛ Credit sale with a written interest agreement.
➛ Sale invoiced without a formal note.
Interest Calculation
A business accepts a 6-month note for 12,000 at 10% interest.
Tasks
1. Calculate interest earned.
2. Determine total amount due at maturity.
Journal Entry Practice
Prepare journal entries for
1. Accepted a 5,000 note from a customer to settle an account receivable.
2. Accrued interest of 250 at year-end.
3. Collected the note plus interest at maturity.
Mini Case Study
A furniture company converts a customer’s overdue balance into a 3-month note of 20,000 at 12% interest.
Questions
➛ Why might the business prefer a note receivable?
➛ Calculate the interest for the note.
➛ What is the total amount to be received at maturity?
➛ Identify the journal entries required.
Quick Quiz
➛ What is a notes receivable?
➛ Who is the maker of a note?
➛ Give one difference between accounts receivable and notes receivable.
➛ Write the interest formula.
➛ True or False | Notes receivable are always interest-free.
Answers ➧ Here
Allowance for Doubtful Accounts ➧ Here