Understanding the Basics of Accounting for Notes Receivable

Oct 13, 2025 by wbrum.org 21 views

Understanding the Basics of Accounting for Notes Receivable

What is a Note Receivable?

A note receivable is a type of asset that represents a promise by one party (the borrower) to pay a specific amount of money to another party (the lender) at a future date. In this case, Talan Company lent $\$ 86,600$ to L. Kanus on a 90-day, $4\%$ note. This means that L. Kanus has agreed to pay Talan Company $\$ 86,600$ plus $4\%$ interest on the principal amount within 90 days.

Journalizing the Lending of Money

To record the lending of money on June 1, we need to follow the accounting equation: Assets = Liabilities + Equity. In this case, the asset is the note receivable, which is the promise to pay $\$ 86,600$ plus interest. The liability is the interest that will be earned on the note.

Debits and Credits

When recording the lending of money, we need to debit the asset account (Notes Receivable) and credit the liability account (Interest Receivable). The debit entry will increase the asset account, while the credit entry will increase the liability account.

Journal Entry

Here is the journal entry for Talan Company:

Date	Account	Debit	Credit	Explanation
June 1	Notes Receivable	$\$ 86,600$		L. Kanus borrowed $\$ 86,600$ from Talan Company
June 1	Interest Receivable	$\$ 3,464$		Interest earned on note receivable (4% of $\$ 86,600$ )

Explanation of the Journal Entry

The debit entry of $\$ 86,600$ to Notes Receivable represents the promise to pay the principal amount of the note. The credit entry of $\$ 3,464$ to Interest Receivable represents the interest that will be earned on the note.

Calculating the Interest

To calculate the interest, we need to multiply the principal amount by the interest rate. In this case, the principal amount is $\$ 86,600$ and the interest rate is $4\%$ . Therefore, the interest is:

$\$ 86,600$ x $4\%$ = $\$ 3,464$

Conclusion

In conclusion, the journal entry for Talan Company's lending of money to L. Kanus on June 1 is:

Date	Account	Debit	Credit	Explanation
June 1	Notes Receivable	$\$ 86,600$		L. Kanus borrowed $\$ 86,600$ from Talan Company
June 1	Interest Receivable	$\$ 3,464$		Interest earned on note receivable (4% of $\$ 86,600$ )

This journal entry represents the promise to pay the principal amount of the note and the interest that will be earned on the note.
Frequently Asked Questions (FAQs) about Notes Receivable

Q: What is a note receivable?

A: A note receivable is a type of asset that represents a promise by one party (the borrower) to pay a specific amount of money to another party (the lender) at a future date.

Q: What are the key components of a note receivable?

A: The key components of a note receivable are:

The principal amount: The amount of money borrowed by the borrower.
The interest rate: The rate at which interest is charged on the principal amount.
The maturity date: The date on which the borrower must pay the principal amount and interest.

Q: How is a note receivable recorded in the accounting records?

A: A note receivable is recorded in the accounting records by debiting the Notes Receivable account and crediting the Interest Receivable account.

Q: What is the difference between a note receivable and a loan?

A: A note receivable is a type of asset that represents a promise to pay a specific amount of money, whereas a loan is a type of liability that represents a debt owed by one party to another.

Q: Can a note receivable be sold or transferred?

A: Yes, a note receivable can be sold or transferred to another party. This is known as factoring.

Q: What are the benefits of using notes receivable?

A: The benefits of using notes receivable include:

Providing a source of funds for the business.
Allowing the business to earn interest on the principal amount.
Providing a way to finance the business's operations.

Q: What are the risks associated with notes receivable?

A: The risks associated with notes receivable include:

The risk of default by the borrower.
The risk of interest rate fluctuations.
The risk of changes in the borrower's creditworthiness.

Q: How is the interest on a note receivable calculated?

A: The interest on a note receivable is calculated by multiplying the principal amount by the interest rate.

Q: Can the interest rate on a note receivable be changed?

A: Yes, the interest rate on a note receivable can be changed. This is known as a rate reset.

Q: What is the difference between a short-term note receivable and a long-term note receivable?

A: A short-term note receivable is a note receivable that matures within one year, whereas a long-term note receivable is a note receivable that matures in more than one year.

Q: How is a note receivable accounted for in the financial statements?

A: A note receivable is accounted for in the financial statements by debiting the Notes Receivable account and crediting the Interest Receivable account.

Q: Can a note receivable be used as collateral for a loan?

A: Yes, a note receivable can be used as collateral for a loan.

Q: What is the difference between a note receivable and a security?

A: A note receivable is a type of asset that represents a promise to pay a specific amount of money, whereas a security is a type of investment that represents ownership in a company or other entity.

Q: How is a note receivable valued?

A: A note receivable is valued by calculating its present value, which is the amount of money that the note receivable is worth today.

Q: Can a note receivable be used to finance a business acquisition?

A: Yes, a note receivable can be used to finance a business acquisition.

Q: What are the tax implications of a note receivable?

A: The tax implications of a note receivable depend on the specific circumstances of the transaction. In general, the interest earned on a note receivable is taxable as ordinary income.

Q: Can a note receivable be used to finance a business expansion?

A: Yes, a note receivable can be used to finance a business expansion.

Q: What are the benefits of using a note receivable to finance a business expansion?

A: The benefits of using a note receivable to finance a business expansion include:

Providing a source of funds for the business.
Allowing the business to earn interest on the principal amount.
Providing a way to finance the business's operations.

Q: What are the risks associated with using a note receivable to finance a business expansion?

A: The risks associated with using a note receivable to finance a business expansion include:

The risk of default by the borrower.
The risk of interest rate fluctuations.
The risk of changes in the borrower's creditworthiness.