How to Account for Notes Receivable? 

Notes receivable is a receivable that specifically deals with promissory notes. Promissory notes are written promises to pay a specific amount of money (such as repayment of a loan). The note may be payable on demand or at a specific time in the future. 

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The payee is the party who has the right to be paid. The payor is the one paying the note. With notes receivable, you (the business) are the payee. The maker of the note is the original creator of the note, and is often the payor - but may be different if the obligation of payment is transferred. 

The principle of the note and that is the base amount promised to be paid. The note will likely also identify an amount of interest to be paid along with the principal. The interest is the amount charged for lending the money until it is repaid. Interest serves as a form of revenue. 

The maturity date tells us the date in which the note must be repaid.

How to Calculate Interest on a Note Receivable?

The formula for calculating the interest rate on a promissory notes is as follows:

Total Interest = Principal of Note x Annual Interest Rate x Time (Fractional Portion of Year) 

The interest is given as an annual percentage rate. So, they're based on the assumption of 12 months.

Example of Notes Receivable

The below video provides 3 examples that take you through the process of accounting for or recording a notes receivable transaction. 

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