Note Receivables

Sometimes, a customer will make a purchase and ask the company to pay off said-purchase overtime or in the future with, essentially, a loan.

In these situations, the customer and company may agree upon a note receivable!

A note receivable is a tool customers & companies can use to enable the customer to pay off a purchase made on account overtime (with interest).

Consider the following situation:

Question: On May 1st, 2022, Hats LLC provided a mass order for their favorite customer, Samantha. To pay off the mass order, they both agree upon a $1,000, 12% annual interest note due in 9 months.

What journal entry should Hats LLC make on...

There’s 3 main stages to a note receivable that we’ll consider, let’s walk through each!

If we were asked to record the entry of the note, we'd be asked for the journal entry on May 1st, 2022.

Question: On May 1st, 2022, Hats LLC provided a mass order for their favorite customer, Samantha. To pay off the mass order, they both agree upon a $1,000, 12% annual interest note due in 9 months.

What journal entry should Hats LLC make on May 1st, 2022?

This journal entry is pretty simple: we’re creating a note receivable here for $1,000…

Question: On May 1st, 2022, Hats LLC provided a mass order for their favorite customer, Samantha. To pay off the mass order, they both agree upon a $1,000, 12% annual interest note due in 9 months.

What journal entry should Hats LLC make on May 1st, 2022?

…therefore, we need to add $1,000 to our Note Receivable account.

How will we add $1,000 to Note Receivable? We’ll debit it, since it has a normal debit balance!

TransactionDebitCredit
Note Receivable$1,000
     ??????

Next, what will we credit?

Consider this: despite Samantha paying Hats LLC for her mass order in 9 months time with her note, we’re still making the sale in May. And based on accrual accounting, that means we must record this sale in the period that it occurs (May)!

In other words, at the time of entry of the note, we’re going to record $1,000 to Sales Revenue.

TransactionDebitCredit
Note Receivable$1,000
     Sales Revenue$1,000

The journal entry recording the creation of the note on May 1st, 2022 would look like this:

TransactionDebitCredit
Note Receivable$1,000
     Sales Revenue$1,000
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