Notes Receivable and Interest Revenue Handled by a Company

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NOTES RECEIVABLE HANDLED BY A COMPANY Notes receivable is a bookkeeping account used to track debt and payments from borrowers. When a small business lends money, goods or merchandise to an individual, it expects repayment. For many types of loans, the business will record the transaction under accounts receivable. In specific situations, however, in which the company receives a signed promissory note guaranteeing repayment, the transaction is recorded under notes receivable. Companies that use notes receivable in their bookkeeping follow the accrual method of accounting. Promissory Notes and Notes Receivable In order to use the notes receivable account, the company must have a signed promissory note to back each borrower account. A promissory note stipulates the amount of debt owed by the borrower, the interest rate, if any, and the terms of payment. The note can be formal or it can be handwritten, dated and signed by the borrower. As long as there is a promissory note, the company should record the amount owed in the notes receivable account in the general journal. Any company, a sole proprietorship, a partnership or a large corporation can issue promissory notes and record the transaction in a notes receivable account. Companies that make Employee Advances If a company makes it a practice to advance wages to an employee, that company might ask for a signed promissory note that details how the employee will repay the advance. The amount of money the employee now owes qualifies as a notes receivable. Companies with Default Accounts Although any company or individual can ask a borrower to sign a promissory note, in small businesses that sell goods or services on account a promissory note can replace a previous agreement to pay. For example, if Mr. Jones purchases $1,000 of food on account from a local grocery store, the store might expect him to pay off his

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