Accounting for Notes Receivable
- Graziano Stefanelli
- Jul 18
- 2 min read
Notes receivable are formal written promises by customers or other parties to pay a definite sum of money at a specified future date, often with interest. They arise from sales, lending, or other transactions requiring more formal credit arrangements. Accurate accounting for notes receivable involves recognizing the asset, measuring interest revenue, handling potential impairment, and properly presenting and disclosing these instruments in the financial statements.
Recognition and Initial Measurement
A note receivable is recorded at its face value (principal amount) when issued. If issued at other than face value (discount or premium), the note is recorded at its present value, with any discount or premium amortized over the life of the note.
Journal Entry at Issuance (Face Value):
Dr. Notes Receivable
Cr. Sales/Service Revenue or Cash
Interest Calculation and Recognition
Interest is accrued periodically based on the note’s stated interest rate and outstanding principal.
Interest Formula:Interest = Principal × Interest Rate × Time
Journal Entry for Interest Earned (not yet received):
Dr. Interest Receivable
Cr. Interest Revenue
When interest is collected:
Dr. Cash
Cr. Interest Receivable
Cr. Interest Revenue (for current period’s interest)
Notes Issued at a Discount or Premium
Discounted Note: The face value exceeds the amount received; the discount is amortized to interest revenue over the note’s term using the effective interest method.
Premium Note: The amount received exceeds face value; the premium is similarly amortized, reducing interest revenue.
Entry at Issuance (Discount):
Dr. Notes Receivable (face value)
Cr. Discount on Notes Receivable
Cr. Sales/Service Revenue or Cash (proceeds)
Impairment and Nonpayment
If collection is doubtful, the carrying value of the note is assessed for impairment. An allowance for doubtful accounts may be established, or a direct write-off is recognized if the note is determined to be uncollectible.
Impairment Entry:
Dr. Bad Debt Expense
Cr. Allowance for Doubtful Notes
Presentation and Disclosure
Notes receivable are presented as current assets if due within one year, and as noncurrent assets if due after one year. The notes’ terms, interest rates, maturity dates, and any collateral should be disclosed in the notes to the financial statements.
Relevant Accounting Standards
US GAAP: ASC 310 – Receivables
IFRS: IFRS 9 – Financial Instruments
Both frameworks require notes receivable to be measured at amortized cost using the effective interest method unless designated as fair value through profit or loss.
Summary Table: Notes Receivable Accounting
____________
FOLLOW US FOR MORE.
DATA STUDIOS
