Definition of notes receivable

Note receivable is a claim that requires a formal instrument as proof of debt and usually provides for payment of interest by the debtor.

Notes receivable are also called promissory notes. That is, they require the debtor to pay the promised amount at a definite time or on demand. One making the promise (i.e., debtor) is called the maker, while one to whom the note is payable (i.e., the creditor) is called the payee. Due (maturity) date is the date when the note receivable is to be paid.

Let’s assume that on April 1, 20X3 Vapaus Company (a fictitious entity) has a $10,000 past due account from Aanbod Company. Vacaus accepts a 60-day, 12% note receivable from Aanbod for $10,000. On April 1, 20X3 Vapaus would make the following journal entry to record the receipt of note receivable:

Account Titles	Debit	Credit
Notes Receivable-Aanbod	$10,000
Accounts Receivable-Aanbod		$10,000

On May 30,20X3 – when the note receivable matures -- Vapaus Company would record interest revenue of $200 (i.e., $10,000 x 2%). If Aanbod pays the note receivable, Vapaus would record cash receipt. However, if Aanbod fails to pay the note receivable, Vapaus would transfer dishonored note receivable and interest into accounts receivable account; and if the account receivable account is deemed uncollectible, the company would write it off against the allowance for doubtful accounts.  In either case, Vacaus would record an Interest Revenue of $200.

If Aanbod pays the note receivable, Vacaus would make the following journal entry on May 30, 20X3:

Account Titles	Debit	Credit
Cash	$10,200
Notes Receivable-Aanbod		$10,000
Interest Revenue		$200

When a note matures in the later fiscal period, the company holding the note receivable recognizes interest revenue at the end of each accounting period (i.e., along with interest receivable) for that period. Interest revenue is usually reported as Other Income.