Question

Why do companies need to create an allowance for doubtful accounts? Describe a situation where a company would create a note receivable. Name an instance where notes payable are needed. Provide an internet reference.

Answer 1

The Convention of Conservatism (Doctrine of Prudence) states that it is better to anticipate the losses but not profit. So the company will make a provision out of account recievable thinking that what if the amount are not paid by some creditors. So they make allowance for doubtful debts since they don't know which customer will not pay the amount and make an entry that debit  bad debts account and credit Allowance for Doubtful Debts account. When the creditors will pay they will write off it.

Note Receivable is a financial instrument which states that the other party has to pay us a sum of amount within a period of time. It can either be short term or long term. We can also call it as promisory notes( includes both notes receivable and payable). A company can create a note receivable when it sells a machinery on credit which is payable within a due date but the company purchased the machinery won't pay the amount. After some days of waiting, the company which sold the machinery comes to an agreement with the other company that it will issue a note receivable payable within some period and with some percent of interest with it. Here the Account receivable is converted as notes receivable

Notes payable are issued when a purchaser want to convert their account payables to notes payables or when they want loan from a lender or wants to expand the time duration of payment which has already been undue.

If you want an internet reference then you can visit to the website corporatefinanceinstitute.com or accountingcouch.com or you can easily study from study.com

Here is the link from where I have studied

https://study.com/academy/lesson/accounting-for-notes-issued-cash-rights-property-goods-services.html