Notes receivable

Definition

Notes receivable are written promises for amounts to be received by the company at a future date. They often include interest and have a specified maturity date.

5 Must Know Facts For Your Next Test

1. Notes receivable can be classified as either current or noncurrent assets depending on their maturity date.
2. They typically involve interest payments, which must be recorded as interest income over time.
3. The principal amount of the note is due at its maturity date, which differentiates it from accounts receivable that are usually due within a short period.
4. Companies must assess the collectibility of notes receivable and may need to recognize an allowance for doubtful notes if collection is uncertain.
5. Notes receivable are formalized through promissory notes, making them legally enforceable claims.

Review Questions

• How do notes receivable differ from accounts receivable in terms of maturity and interest?
• Why might a company classify a note receivable as noncurrent?
• What accounting entries are involved when recognizing interest income on notes receivable?

Related terms

Accounts Receivable:

Amounts owed to the company by customers that are typically due within a short period.

Current Assets:

Assets expected to be converted to cash or used up within one year or one operating cycle.

Noncurrent Assets:

Assets that are not expected to be converted into cash or used up within one year or one operating cycle.