How to Journalize Accrued Interest on Notes Receivable
Notes receivable are assets that present a future economic value to a business. A note receivable occurs when a company loans money to an individual or another business. When a company expects to receive full payment for a note within one year, the note is classified as a current asset. A company that expects to collect a note in over one year classifies the note as a long-term asset. Companies lend money in hopes of collecting interest on the loan. Accrued interest on the note is recorded in the general journal.
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Instructions
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1
Calculate the interest accrued on the note receivable. Assume a company loans $10,000 to another business at 9 percent interest with a two-year maturity date. Multiply $10,000 by 9 percent to determine the interest the company will receive for the entire year. In this scenario, the company will accrue $900 in interest revenue for the year. Divide the interest revenue accrued for the year by 12 to determine the monthly interest revenue accrued. In this case, the company accrues $75 interest revenue per month on the note receivable.
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2
Record the date of the journal entry. Enter the day and month when the company recognizes interest revenue on the note.
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Debit interest receivable for the applicable amount. Using the calculation from step 1, the company must debit interest receivable for $75. This entry indicates an increase in a current asset because the company can expect to collect the interest payment from the borrower within one year.
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Credit the interest revenue account for the same amount as the interest receivable debit because debits and credits must always balance. Draft a $75 credit to the interest revenue account. Crediting the interest revenue account indicates the company gained revenue as a result of interest accrued on a note receivable. An increase in revenue increases the company’s net income, which ultimately increases shareholders’ equity.
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