Where Is A Notes Receivable Reported In The Balance Sheet?

Have you ever extended credit to a customer and received a formal promise to repay in return? If so, you're holding a note receivable, a valuable asset for your business. But where exactly does this asset reside on your financial report? This article explains how notes receivable are categorized depending on their repayment timeframe.

What is a Notes Receivable?

Definition and Characteristics of Notes Receivable

Notes receivable are written promissory notes that a company receives from a debtor. The note's principal amount is the amount the debtor promises to pay back. Notes receivable are recorded as an asset on the balance sheet, whether they are current or non-current assets.

The payee of a note receivable is the company or individual expected to receive payment from the debtor. Unlike accounts receivable, which are usually paid off within one year, a note receivable can have time to pay that extends beyond the year of the balance sheet date.

A note payable is the counterpart to a note receivable, with the maker of the note being the debtor who is obligated to pay the note. The principal balance of the note receivable is the principal of the note reported on the balance sheet date.

A note receivable expected to be repaid within a year is typically classified as a current asset. However, if repayment is due after one year, the note receivable is classified as a non-current asset on the balance sheet.

Key Differences Between Notes Receivable and Accounts Receivable

Accounts Receivable:

• Represents amounts owed by customers for goods or services provided on credit.
• Arises from selling goods or services on credit terms, where payment is expected to be received within a short period, typically 30 to 90 days.
• Usually, it does not involve a formal written agreement between the company and the debtor.
• It is recorded as a current asset on the balance sheet since payment is expected within a short timeframe.
• Generally, interest is not applicable as accounts receivable arise from routine sales transactions.

Notes Receivable:

• This is reported when a company issues a promissory note, which is a formal written agreement requiring the debtor to pay back the note plus interest.
• Arises from lending money, making investments, or extending credit over a longer period, usually beyond one year.
• It involves a formal written agreement specifying the repayment terms, including the principal amount, interest rate, and maturity date.
• The principal part of a note receivable is reported as a current asset if due within one year of the balance sheet date; otherwise, it's reported as a noncurrent asset under notes receivable.
• Interest is recorded as a current asset if it is due within one year of the balance sheet date.

Further Reading: Understanding Bad Debt Expense: Definition, Overview & Calculation Methods

Where Is Notes Receivable Reported in the Balance Sheet?

Placement of Notes Receivable in the Balance Sheet

Notes receivable are typically placed in the assets section of the balance sheet, just like accounts receivable. However, there is a key difference between the two. While accounts receivable represent amounts owed by customers for goods or services provided on credit, notes receivable are formal agreements where the borrower promises to repay a specific amount by a certain date.

If a borrower fails to repay the note, the company may need to write off any notes receivable that are deemed uncollectible. For example, if a company holds a note that is 10% interest, this will also be reflected on the balance sheet alongside the principal amount.

Notes Receivable as a Current Asset

Notes receivable are classified as current assets when the repayment period is within one year. This is different from accounts receivable, which are typically due within 30 to 90 days. If a company is unable to collect on a note receivable, it may need to write off any notes receivable that are deemed uncollectible. For example, if a customer fails to pay back a note that is ten months overdue, this would need to be written off as a bad debt expense.

Comparing Notes Receivable with Other Balance Sheet Items

Accounts receivable refers to the money owed to a company by its customers for goods or services provided on credit. In comparison, a note receivable is a loaner's written promise to pay a specified amount at a specified date, typically with interest. The key difference between the two is that an accounts receivable does not involve a formal written agreement, while a note receivable does.

How Are Notes Receivable Recorded?

Journal Entries for Notes Receivable

Journal entries for notes receivable involve recording promissory notes that a business receives from another party. Just like accounts receivable, notes receivable is a balance sheet asset account.

The principal of the note receivable, the time frame or duration the maker has to pay back, and the expected collection date are reported on the balance sheet along with the note receivable.

When the maker makes the note, the store will record a journal entry to reflect the transaction. Typically, notes receivable are expected to be collected within one year, making them different from accounts receivable.

Components of Notes Receivable

Notes receivable are balance sheet items that record the value of promissory notes. The note is classified as a current asset in the current asset section. Notes receivable are typically for less than one year. A note receivable allows the person who makes the note to pay off the debt to the person who holds the note.

At an interest rate of 10%, the receivable may have additions to the principal. Accounts receivable due by the balance sheet date are reported as a receivable entry on its balance sheet. Notes receivable usually involve written promises to pay back a specific amount within a certain time frame.

When dealing with doubtful notes receivable, companies may need to evaluate the likelihood of collection. This evaluation can impact the company's financial statements and overall financial health. It is important for companies to carefully monitor their notes receivable to ensure proper accounting and management of assets.

The components of notes receivable include:

1. Principal Amount: This is the original amount of money loaned or invested, which the debtor promises to repay according to the terms of the promissory note.
2. Interest Rate: The rate at which interest accrues on the principal amount. It's specified in the promissory note and determines the interest the debtor must pay on the outstanding balance.
3. Maturity Date: When the note matures or becomes due for repayment. It's also specified in the promissory note and marks the end of the repayment period.
4. Interest Income: The interest earned on the note receivable over its term. It's calculated based on the principal amount and the specified interest rate.
5. Interest Receivable: If the interest due on the note has not been received by the balance sheet date, it's recorded as interest receivable, representing the interest the debtor owes but hasn't paid yet.
6. Current Portion of Notes Receivable: This represents the portion of the principal amount due for repayment within one year of the balance sheet date. It's classified as a current asset since it's expected to be realized within the next operating cycle.
7. Noncurrent Portion of Notes Receivable: This represents the portion of the principal amount not due for repayment within one year of the balance sheet date. It's classified as a noncurrent asset since it's not expected to be realized within the next operating cycle.

Further Reading: How To Calculate Net Credit Sales: Formula and Examples for Efficient Accounting

Notes Receivable Terms

A note receivable usually includes a predetermined interest rate of 10%. The receivable is an asset that represents the debt balance. The note will mature at a specified date. The note may state that the total issue a note payable amount due is 10%.

Notes receivable terms typically include:

1. Predetermined Interest Rate: A specified interest rate, often around 10%, is applied to the note's principal amount. This rate determines the interest the debtor will pay on the outstanding balance over the note term.
2. Maturity Date: The date the note matures or becomes due for repayment. This marks the end of the repayment period and is crucial for determining when the debtor must repay the principal amount and any accrued interest.
3. Total Amount Due: The total amount the debtor owes, including the principal amount and any accrued interest. This is calculated based on the predetermined interest rate and the note's term.
4. Note Payable Amount: The amount specified in the note that the debtor agrees to repay. This includes the principal amount plus any accrued interest, typically at the predetermined interest rate stated in the note.

Example of Notes Receivable and Maturity Date

Let's say a company lends $10,000 to a customer on January 1, 2023, and the customer signs a promissory note agreeing to repay the loan plus interest at a predetermined rate of 8% per year. The terms of the note specify that the loan must be repaid in full within one year.

In this example:

• Principal Amount: $10,000 (the initial amount of the loan)
• Predetermined Interest Rate: 8% per year
• Maturity Date: January 1, 2024 (one year from the loan origination date)

The terms of the note receivable state that the customer must repay the principal amount of $10,000 plus interest accrued at 8% per year by the maturity date of January 1, 2024. This provides clarity for both the lender and borrower regarding their obligations and the timeline for repayment.

How to Calculate and Report Notes Receivable?

Interest Rate Calculation on Notes Receivable

Interest = Principal Amount × Interest Rate × TimeThe interest rate calculated on notes receivable depends on the terms of the note itself. Unlike accounts receivable, notes receivable have a specified interest rate typically higher than the market rate. For example, if the interest rate on a note is 10%, interest will be calculated based on that rate.

Reporting Notes Receivable at the Balance Sheet Date

When reporting notes receivable on the balance sheet date, it's important to distinguish them from accounts receivable. While accounts receivable represent amounts customers owe for goods or services provided on credit, notes receivable arise from formal agreements requiring repayment of a specific amount plus interest.

Notes receivable are reported differently depending on their maturity date:

• The current portion of the notes receivable, the remaining principal amount due within one year, is reported as a current asset.
• The noncurrent portion of the notes receivable, representing the remaining principal due beyond one year, is reported as a noncurrent asset in the noncurrent asset section entitled "Notes Receivable."

This classification ensures an accurate representation of the asset's value on the balance sheet. It distinguishes between amounts expected to be realized within the next operating cycle (current assets) and those not expected to be realized within that timeframe (noncurrent assets).

Summary

Notes receivable represents an asset for a company, similar to accounts receivable, but with distinctive features. Unlike accounts receivable, which are typically short-term and arise from sales on credit, notes receivable involve formal agreements with specified repayment terms. They are reported in the current asset section if the note's remaining principal will be collected within a year, otherwise in the noncurrent asset section.

The remaining principal of the note reflects the amount yet to be collected, and the note's term, such as 10, signifies the duration until repayment. Understanding the differences between accounts receivable and notes receivable is crucial in managing a company's financial assets effectively.

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