How to Record a Note Receivable

Extending a short term loan to a customer would be recorded in your books as a note receivable.

Use a note receivable account to record a loan to you customer. Set up a note receivable account when a customer or client in a written agreement agrees to pay your company a set amount of money owed on a specific date. A note receivable account is an asset account because it is money your company is owed. Debits are always on the left side of the balance sheet and credits are on the right side.

Instructions

1. Debit "Note Receivable" and Credit "Accounts Receivable" in the General Journal. This transaction transfers the debt from accounts receivable to note receivable. This transaction is only necessary if the funds were originally recorded in accounts receivable.

2. Debit "Cash," credit "Note Receivables" and credit "Interest Income." Record this transaction in the General Journal when you receive the maturity value of the note. Use interest income if you charged the customer interest.

3. Debit "Accounts Receivable," credit "Interest Income" and credit "Note Receivable." Record this transaction in the General Journal if the terms of the note are not met. This means your customer refused to pay the note as agreed. This removes the note from note receivable and places it back in accounts receivables.

Tips & Warnings

• If you use accounting software, check with your software if it has specific procedures for notes receivable accounts. Many do not, so enter the transactions using the General Journal.

References

• Principles of Accounting: Notes Receivable
• Bean Counter: Debit/Credit Cheat Sheet

Resources

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