Recognizing Notes Receivable

Notes receivable are written promises showing that a customer will pay a certain amount on a specific future date, typically with interest.

For example, Delta Corporation sells goods worth ten thousand dollars to a customer who cannot pay immediately and agrees to sign a ninety-day note promising to repay the amount with six percent annual interest.

To classify this as a note receivable, Delta Corporation must ensure that the note includes key details such as the principal amount, interest rate, maturity date, and the payee's signature.

Once these conditions are met, Delta Corporation records it by debiting Notes Receivable for ten thousand dollars and crediting Sales for the same amount.

The total interest on the note is $150, which is recognized as income over the length of the note.

Upon receiving full payment, Delta Corporation records it by debiting the accrued interest receivable and crediting the interest revenue account for the interest amount. It also debits the cash account for the full amount received and credits the notes receivable and accrued interest receivable accounts.

In summary, notes receivable are formal, interest-bearing promises to pay and are recorded as financial assets.