Question

please explain the nature of a note receivable? How is it different from an account receivable? How is interest calculated on a note receivable? What do we mean by the maturity value of a note receivable?

Answer 1

Answer

Nature of a note receivable:

Notes Receivable represents claims for which formal instruments of credit are issued as evidence of debt, such as a promissory note. Often a business will allow a customer to convert their overdue accounts into a notes receivable. Doing so gives the debtor more time to pay. Occasionally, the notes receivable will include a personal guarantee by the owner of the debtor.

A notes receivable normally requires the debtor to pay interest and extends for time periods of 30 days or longer. Notes receivable are considered current assets if they are to be paid within 1 year and non-current if they are expected to be paid after one year.

How is it different from an account receivable:

Notes Receivable

In accounting language the company extending credit against a note receivable is called payee of the note and would account for this amount as note receivable whereas the client who needs to pay against that note is called maker of the note. The maker accounts for amount as note payable. Notes receivable carry interest charges, the face or recorded value of note is the primary sum of credit offered.

Accounts Receivable

When a company sells goods or provides services bills the buyer of goods or services later, we call it as an account receivable. For instance, a company may hire lawn mowing services from a provider, who provides the required services on the 1st of the month but bills the buyer of services on the 20^th of that month, much after the services were provided. The company which provided services accounts for the amount as account receivable in the general ledger whereas the buyer or the company which availed of the services accounts for the amount as an account payable.

How is interest calculated on a note receivable

A note receivable is an amount of money a customer or other party owes your company. Your company earns interest on the note receivable to compensate you for extending credit. The amount of interest you earn on the notes receivable in an accounting period, but have yet to be paid, is called interest receivable. The amount of interest you earn regardless of when you receive payment is called interest revenue. You can calculate these amounts at the end of your accounting period and report the amounts on your financial statements.

What do we mean by the maturity value of a note receivable:

Maturity value is the amount that the company (maker) must pay on a note on its maturity date; typically, it includes principal and accrued interest, if any.