Notes Receivable vs. Accounts Receivable
In accounting, notes receivable is when one party extends a line of credit to another party with the promise to pay at a future date. When a party sells a good or renders a service but has not yet paid for those goods or services, it is an account receivable.
Other People Are Reading
-
Notes Receivable
-
Accountants refer to the party who extends the line of credit on a note receivable as the payee of the note. The payee records this note as a note receivable. The party making payments on the note is the maker. The maker of the note records the note as a note payable. Although there are interest charges associated with notes receivable, the face value of the note is the principal amount of credit extended.
Types
-
Notes receivable are either long-term or short-term notes. When the term of the note is less than 12 months, meaning the maker of the note pays it off within a year, it is a short-term note receivable. The payee reports the short-term note receivable to the balance sheet as a short-term asset. When the term of the note is greater than one year, it is long-term note receivable. The payee reports the long-term note receivable to the balance sheet as a long-term asset. Accountants also refer to short-term notes as current notes receivable and long-term notes as non-current notes receivable.
-
Accounts Receivable
-
When a party sells a good or performs a service and bills the party that receives the good or services later, it is an accounts receivable. For example, a company hires a lawn service that comes on the first of the month to mow the lawn. The lawn service bills the company on the 15th of the month for services already rendered. The lawn service records this as an account receivable on its general ledger and the company records this as an account payable.
Accounts Receivable Terms
-
Accounts receivable are typically short-term assets because payment is due within 12 months. When a company fails to receive payment on its accounts receivable, it will write the amount off the bad debt, called a direct write-off, or write off the debt using the allowance method. For the direct write-off method, the company writes off the actual amount of a receivable that was not paid. For the allowance write-off method, the company estimates the amount of accounts receivable that it expects to not be paid.
-
