Notes Receivable Account

• On any given date, a company can report various types of payments it expects to receive in a wide range of receivables accounts. When the company expects payment within one year, accountants generally report the amount in accounts receivable. However, when the company make a long-term loan and expects to receive payments over a number of years, accountants report the balance in a notes receivable account.
  
  

Increasing Notes Receivable

• When a company makes a loan or extends credit to a customer to purchase goods or services with long-term repayment terms, the company creates or increases an existing notes receivable account for the amount of the loan or line of credit. In the case of a loan, the company posts two journal entries to record the transaction. The first is a debit to the notes receivable account in the amount of the loan and a credit entry for the same amount to the cash account to report the outflow of cash to the borrower. However, if the note relates to the extension of credit to a customer, the debit entry remains the same, but the credit entry is made to a revenue account to report the sale.
  
  

Decreasing Notes Receivable

• Journal entries are necessary every time the borrower or customer makes a payment that reduces the balance of their debt. For example, suppose a borrower makes a $1,000 loan payment. Accountants must then reduce the notes receivable account balance with a credit entry of $1,000 and a debit entry to the cash account for the same amount to report the inflow of cash. However, unlike short-term receivables, companies will charge the borrower or customer interest. For example, if the borrower makes a $1,200 payment, of which $200 represents interest charges, accountants must also make a $200 debit entry to cash and a corresponding credit entry to the interest receivable account to reduce its balance.
  
  

Financial Statement Reporting

• At the end of a company’s fiscal year, accountants prepare a balance sheet that provides the ending balances for all assets, liabilities and equity accounts. Since the notes receivable account is an asset, its balance is subject to reporting in the asset section of the financial statement. In addition, the income statement for the same fiscal year will report all interest that the company earns from its notes, as well as the revenue it earns from credit sales to customers.