Note Receivable

Note Receivable Promissory Note Accounts Receivable Maker Payee Financial Instrument Accounting Finance
A Note Receivable is a financial instrument representing a written promise from a debtor to pay a specified sum of money to the creditor at a future date or on demand.
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Note Receivable

Definition

A Note Receivable is a financial asset that represents a formal written promise (promissory note) from the maker (debtor) to pay a specific amount of money to the payee or holder (creditor) at a future date or upon demand. This promise is legally binding and includes terms such as the interest rate to be applied, maturity date, and other relevant conditions of payment.

Examples

  1. Commercial Loans: A business might issue a promissory note to a supplier promising to pay for goods over an agreed period of time.
  2. Intercompany Loans: A parent company may give a loan to its subsidiary company, documented through a promissory note, detailing repayment and interest terms.
  3. Personal Loans: Individuals can issue promissory notes to formalize loans between friends or family members with agreed repayment schedules.
  4. Installment Payments: Businesses selling high-value items like vehicles or equipment commonly use notes receivable to structure installment payment terms.

Frequently Asked Questions (FAQs)

What differentiates a Note Receivable from an Account Receivable?

  • Account Receivable: Represents amounts owed by customers for goods or services provided on credit, typically less formal and covering a shorter term.
  • Note Receivable: Is more formal with clearly defined terms, often bearing interest and used for longer repayment periods.

How is a Note Receivable recorded in the financial statements?

Notes Receivable are recorded as assets in the balance sheet. Depending on the term, they are classified as either current (due within one year) or non-current (due after one year).

What happens if the maker defaults on a Note Receivable?

If the maker defaults, the holder of the note may take legal action to enforce payment. The note may also be written off as bad debt after assessing its uncollectibility.

  • Promissory Note: A written promise to pay a certain sum of money at a specific time or on demand.
  • Maker: The individual or entity who promises to pay the amount specified in a note receivable.
  • Note Payable: The liability counterpart to a Note Receivable, representing the obligation to pay the amount owed under the terms of a promissory note.
  • Accounts Receivable: Amounts owed to a company by its customers for goods or services provided on credit.

Online References

Suggested Books for Further Studies

  1. “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield

    • Key insights into the presentation and management of notes receivable in financial statements.

  2. “Financial Accounting Theory and Analysis: Text and Cases” by Richard G. Schroeder, Myrtle W. Clark, and Jack M. Cathey

    • Detailed exploration of accounting principles related to receivables and other financial instruments.

  3. “Fundamentals of Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, and Bradford D. Jordan

    • Comprehensive guide on financial management practices, including handling of notes receivable.

Fundamentals of Note Receivable: Accounting Basics Quiz

### What document is associated with a Note Receivable? - [ ] Invoice - [ ] Purchase order - [x] Promissory note - [ ] Sales contract > **Explanation:** A Note Receivable is associated with a promissory note, which is a formal written agreement outlining the terms of repayment. ### In what financial statement is a Note Receivable recorded? - [x] Balance sheet - [ ] Income statement - [ ] Statement of cash flows - [ ] Statement of shareholders' equity > **Explanation:** Note Receivables are recorded as assets on the balance sheet. ### What is the term used to describe the person or entity who promises to pay a note receivable? - [ ] Lender - [x] Maker - [ ] Holder - [ ] Payee > **Explanation:** The 'maker' is the individual or entity who promises to pay the amount specified in the note receivable. ### Which of the following best describes the note receivable with a maturity date within one year? - [x] Current asset - [ ] Non-current asset - [ ] Intangible asset - [ ] Deferred asset > **Explanation:** Note receivables with a maturity date within one year are classified as current assets. ### If a debtor fails to pay a note receivable on its due date, it is often considered as: - [ ] Prepaid expense - [x] Bad debt - [ ] Unearned revenue - [ ] Consigned goods > **Explanation:** A Note Receivable that is not paid when due is often considered bad debt. ### Which characteristic is necessary for a Note Receivable to be full and enforceable? - [x] It must be written and signed - [ ] It should be verbal - [ ] It should have no interest rate - [ ] It must be indeterminate > **Explanation:** To be enforceable, a Note Receivable must be in written form and signed by the parties involved. ### What kind of note extends principal and interest payments over several predefined periods? - [ ] Demand note - [ ] Revolving note - [x] Installment note - [ ] Callable note > **Explanation:** An installment note extends principal and interest payments over several predefined periods. ### What impact does a Note Receivable have on a company's liquidity? - [ ] It decreases - [x] It increases - [ ] It has no effect - [ ] It depends on the debtor > **Explanation:** Generally, a Note Receivable increases a company's liquidity since it represents a claim to cash that is convertible to cash within an operational period. ### What is the classification for notes due beyond a year? - [ ] Short-term investment - [x] Non-current asset - [ ] Current liability - [ ] Long-term liability > **Explanation:** Notes due beyond one year are classified as a non-current asset. ### What financial action can a company take before a Note Receivable matures? - [ ] Ignore it - [x] Discount it - [ ] Write it off - [ ] Convert it to cash > **Explanation:** A company can discount a Note Receivable, which means selling the note to a third party before it matures, to obtain cash earlier.

Thank you for exploring the comprehensive details of Note Receivables and challenging yourself with our quiz questions. Keep yourself informed and excel in your financial literacy journey!

Wednesday, August 7, 2024
Note, Note Payable
Note Issuance Facility (NIF)
Normal Operating Cycle January 1, 1
On Account January 1, 1
Promissory Note January 1, 1
Tenor January 1, 1
Account Statement January 1, 1
Accrual January 1, 1
Age Analysis January 1, 1
Amortization January 1, 1
Amount January 1, 1
Arrearage January 1, 1

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