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.

Accounting for cash (sales) discounts

Let's see how the credit term of 2/10, n/30 works in an example.

Michael & Co Ltd. ships $1,000 of goods to a customer. If the customer pays Michael & Co Ltd. within 10 days of the invoice date, the customer is allowed to deduct $20 (2% of $1,000) from the purchase of $1,000. In other words, the $1,000 amount can be settled for $980 if it is paid within the 10-day discount period.

In the situation when the buyer is paying the account payable to Michael & Co Ltd. for $1,000 early enough to receive a 2% discount, the following entry is made by the buyer:

Account Titles	Debit	Credit
Accounts Payable	1,000
Purchases Discount		20
Cash		980

On the other hand, in the case when we are receiving payment from the Customer for a $1,000 account receivable early enough to offer a 2% discount, the seller would make the following entry:

Account Titles	Debit	Credit
Cash	980
Sales Discount	20
Accounts Receivable		1,000

The method of recording the cash (sales) discounts is called the Gross Method.

Also see : Explanation of 2/10, n/30 credit terms

Explanation of 2/10, n/30 credit terms

Indication "2/10, n/30" (or "2/10 net 30") on an invoice represents a cash (sales) discount provided by the seller to the buyer for prompt payment.

The term 2/10, n/30 is a typical credit term and means the following:

• "2" shows the discount percentage offered by the seller.
• "10" indicates the number of days (from the invoice date) within which the buyer should pay the invoice in order to receive the discount.
• "n/30" states that if the buyer does not pay the (full) invoice amount within the 10 days to qualify for the discount, then the net amount is due within 30 days after the sales invoice date.

The terms offered by the seller usually depend on the trade custom. Some variations of the cash discount terms, among others, may be "2/15, n/30" (2% discount for the payment within 15 days and the full amount to be paid within 30 days) or "n/10 EOM" (the invoice is due and payable 10 days after the end of the month in which the sale occurred).

In accounting, a cash (sales) discount represents an expense to the seller. The account used to recognize the expense may be called "Sales Discount" or "Discount on Sales."

The buyer treats such a discount as a reduction of the cost and uses the account called "Purchases Discount" or "Discount on Purchases."

Purchase Order

Purchase order (PO) is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a purchase order to a supplier constitutes a legal offer to buy products or services. Acceptance of a purchase order by a seller usually forms a one-off contract between the buyer and seller, so no contract exists until the purchase order is accepted.

Debit memo

When a company fails to pay or short-pays an invoice, it is common practice to issue a debit memo for the balance and any late fees owed. In function debit memos are identical to invoices. 

Credit Memo

If the buyer returns the product, the seller usually issues a credit memo for the same or lower amount than the invoice, and then refunds the money to the buyer, or the buyer can apply that credit memo to another invoice.

Invoice

An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms. The buyer has a maximum amount of days to pay these goods and are sometimes offered a discount if paid before. From the point of view of a seller, an invoice is a sales invoice. From the point of view of a buyer, an invoice is a purchase invoice

An invoice is essentially a detailed bill left by vendors and outside suppliers for goods or services rendered to a company. A typical invoice might list the quantity of each item, prices, billable hours, service description and a contact address for payment. While some expenses may be paid out of a general fund or petty cash account an invoice is usually paid through an accounts payable department by the posted due date.

An invoice is a legal document which can be used as evidence of an incurred debt. The recipient of the goods or services can challenge the legitimacy of individual charges, but the invoice itself is considered a bona fide debt. Sometimes a vendor or serviceman cannot collect on a bill immediately, so their company will send an invoice at a later date for payment. The actual daily expense of a service may be so low that a company will simply wait for a larger invoice to cover all of the costs at once. Vending machine attendants and bottled water providers may only send one invoice a month instead of billing the company a few dollars a day for supplies.

Accounts Payable - Accounts Receivable

Accounts Payable :- An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities.

Accounts Payable are often referred to as 'Payables'.

Another common usage of  AP refers to a business department or division that is responsible for making payments owned by the company to suppliers and other creditors.

Journal entries - Accounts Payable Process

When you purchase a good or service on account the journal entry is

Debit - The appropriate expense account for the amount
Credit - Accounts Payable for the amount

When  the account is paid the journal entry is

Debit - Accounts Payable for the amount
Credit - Cash for the amount.

Accounts Receivable - Accounts Receivable is a current asset that reports the amount that a companys customers owe the company for the goods or services provided on credit.

Journal entries - Accounts Receivables Process 

Journal entry when billing customers

Debit - Accounts Receivables
Credit - Revenue account

When account receivable is collected

Debit - Cash account
Credit - Accounts Receivables account