What are the characteristics of a notes receivable?

Notes receivable have several defining characteristics that include principal, length of contract terms, and interest. The principal of a note is the initial loan amount, not including interest, requested by the customer. If a customer approaches a lender, requesting $2,000, this amount is the principal.

Who is the payee on a note receivable?

The lender uses the note to make the loan legal and enforceable. Such notes typically bear interest charges. The maker of the note is the party promising to make payment, the payee is the party to whom payment will be made, the principal is the stated amount of the note, and the maturity date is the day the note will be due.

When does a journal entry recognize notes receivable?

Journal Entries Recognition of Notes Receivable. Common examples when notes receivable should be recognized are as follows: Lending cash to other parties. If a business lends cash to another party against a promissory note, it should make an entry in the general journal by debiting Notes receivable and crediting the Cash account.

How are notes payable and promissory notes different?

Notes Payable is a liability as it records the value a business owes in promissory notes Promissory Note A promissory note refers to a financial instrument that includes a written promise from the issuer to pay a second party – the payee – a specific sum of money, either on a specific future date or whenever the payee demands payment.

Who is responsible for interest on notes receivable?

Since the note has matured, the holder or payee removes the note from Notes Receivable and records the amount due in Accounts Receivable. At the maturity date of a note, the maker is responsible for the principal plus interest. The payee should record the interest earned and remove the note from its Notes Receivable account.

What does it mean to discount notes receivable?

Discounting Notes Receivable Just as accounts receivable can be factored, notes can be converted into cash by selling them to a financial institution at a discount. Notes are usually sold (discounted) with recourse, which means the company discounting the note agrees to pay the financial institution if the maker dishonors the note.