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What Are Notes Receivable

Notes receivable is an asset account that records the value of promissory notes owed to a business that are expected to be paid. A promissory note is a written promise to pay a specified amount to another party on or before a future date, and gives the holder the legal right to receive payment. Notes receivable are classified as either a current or non-current asset depending on when payment is due. Businesses sometimes allow overdue customer accounts to be converted to notes receivable to give debtors more time to pay.

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74 views2 pages

What Are Notes Receivable

Notes receivable is an asset account that records the value of promissory notes owed to a business that are expected to be paid. A promissory note is a written promise to pay a specified amount to another party on or before a future date, and gives the holder the legal right to receive payment. Notes receivable are classified as either a current or non-current asset depending on when payment is due. Businesses sometimes allow overdue customer accounts to be converted to notes receivable to give debtors more time to pay.

Uploaded by

Darlene Sarcino
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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What are Notes Receivable?

Notes receivable is 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.

Key Components of Notes Receivable

Here are the key components of notes receivable:

 Principal value: The face value of the note


 Maker: The person who makes the note and therefore promises to pay
the note’s holder. To a maker, the note is classified as a note payable.
 Payee: The person who holds the note and therefore is due to receive
payment from the maker. To a payee, the note is classified as a note
receivable
 Stated interest: A note receivable generally includes a predetermined
interest rate; the maker of the note is obligated to pay the interest
amount due, in addition to the principal amount, at the same time that
they pay the principal amount.
 Timeframe: The length of time during which the note is to be repaid.
Notes receivable are not usually subject to prepayment penalties, so the
maker of the note is free to pay off the note on or before the note’s
stated due, or maturity, date.
 

Example of Notes Receivable

Company A sells machinery to Company B for $300,000, with payment due


within 30 days. After 45 days of nonpayment by Company B, both parties
agree that Company B will issue a note payable for the principal amount of
$300,000, at an interest rate of 10%, and with a payment of $100,000 plus
interest due at the end of each month for the next three months. 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.

In this example, Company A records a notes receivable entry on its balance


sheet, while Company B records a notes payable entry on its balance sheet.
The principal value is $300,000, $100,000 of which is to be paid monthly. In
addition, the agreed upon interest rate on the note is 10%.

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