JournaldrillNotes receivable
When a customer gives you a promissory note, debit Notes Receivable and credit Accounts Receivable (or Sales, or Cash if you lend money). Interest earned is credited to Interest Revenue as time passes. At maturity debit Cash for principal plus interest and credit Notes Receivable and Interest Revenue (or Interest Receivable).
Syntax
Accept: Dr Notes Receivable / Cr Accounts Receivable; Maturity: Dr Cash (principal + interest) / Cr Notes Receivable, Cr Interest Revenue| Part | What it is |
|---|---|
Notes Receivable | Asset for the principal of the note. |
Interest Revenue | Principal x rate x time, earned over the life of the note. |
Interest Receivable | Asset for interest earned but not yet received at a balance sheet date. |
Dishonored note | A note not paid at maturity; it is transferred back to Accounts Receivable including the interest due. |
Examples
Dr Notes Receivable 6,000 / Cr Accounts Receivable 6,000Result: One receivable swapped for another; total assets unchanged
Customer replaces an overdue 6,000 account with a 60-day, 9% note.
Dr Cash 6,090 / Cr Notes Receivable 6,000, Cr Interest Revenue 90Result: Assets up 90 net, revenue 90
Collected at maturity: 6,000 x 9% x 60/360 = 90 interest.
Dishonored: Dr Accounts Receivable 6,090 / Cr Notes Receivable 6,000, Cr Interest Revenue 90Result: Note removed; full amount owed now sits in accounts receivable
Interest is still earned even though the customer did not pay.
Common mistakes
- Recording the note at maturity value: Notes Receivable is debited for principal only; interest is recognized as it is earned.
- Forgetting to accrue interest at year end on a note that matures next year: the earned portion belongs in this year's revenue.
- Writing off a dishonored note immediately: move it to Accounts Receivable first and pursue collection; write off only if it proves uncollectible.
Practice Notes receivable
These drills check your answer on live data, free, no account needed.
- Accepting a customer noteFernway Garden Center agrees to let a customer, Holt Landscaping, settle its overdue $4,800 account by signing a 90-day, 9% note receivable for the same amount.
- Accrued interest on a noteOn September 1, Copper Kettle Cafe borrowed $24,000 from its bank by signing a one-year, 6% note payable. Principal and all interest are due at the end of the year. Record the interest adjusting entry on December 31.
Questions
What is the journal entry when a customer signs a note for an account?
Debit Notes Receivable and credit Accounts Receivable for the amount of the note.
How do you record a dishonored note receivable?
Debit Accounts Receivable for principal plus interest, credit Notes Receivable for the principal and credit Interest Revenue (or Interest Receivable) for the interest.
Related
- Notes payableHow to record a promissory note: Dr Cash, Cr Notes Payable when borrowing; Dr Interest Expense, Cr Interest Payable at period end; repayment at maturity.
- Accrued interestHow to accrue interest on a note at period end: Dr Interest Expense, Cr Interest Payable (borrower) or Dr Interest Receivable, Cr Interest Revenue (lender).
- Sale on accountHow to record a sale on credit: debit Accounts Receivable, credit Sales or Service Revenue, plus the cost of goods sold entry and the later collection.
- Writing off a receivableHow to write off an uncollectible account: Dr Allowance for Doubtful Accounts, Cr Accounts Receivable (allowance method) or Dr Bad Debt Expense (direct).