Section 3Notes Receivable

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Chapter 26

Section 3 Notes Receivable

• What Youll Learn
• How to record the issuance of a note receivable.
• How to record payments on a note receivable.

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Section 3 Notes Receivable (cont'd.)
Chapter 26

Why Its Important Many businesses accept notes
receivable and receive payments on those notes.

• Key Terms
• other revenue

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Section 3 Notes Receivable (cont'd.)
Chapter 26

Accounting for Notes Receivable

• Promissory notes that a business accepts from
  customers are called notes receivable.
• Notes Receivable is an asset account, and its
  normal balance is a debit.
• The interest earned on a note receivable is
  recorded in a revenue account called Interest
  Income.

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Section 3 Notes Receivable (cont'd.)
Chapter 26

Recording the Receipt of a Note Receivable
Business Transaction

On March 1, On Your Mark sold 1,750 of
merchandise on account to Joe Dimaio. That
transaction was recorded in On Your Marks sales
journal. Joe cannot pay his account by the due
date. On April 8, On Your Mark received a 60-day,
12.5 note dated April 6 for 1,750 from Joe
Dimaio to settle the account receivable, Note 4.

ANALYSIS Identify 1. The accounts affected are
Notes Receivable, Accounts Receivable
(controlling), and Accounts ReceivableJoe Dimaio
(subsidiary).

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Section 3 Notes Receivable (cont'd.)
Chapter 26

Recording the Receipt of a Note Receivable
(cont'd.)

Business Transaction (cont'd.)
On March 1, On Your Mark sold 1,750 of
merchandise on account to Joe Dimaio. That
transaction was recorded in On Your Marks sales
journal. Joe cannot pay his account by the due
date. On April 8, On Your Mark received a 60-day,
12.5 note dated April 6 for 1,750 from Joe
Dimaio to settle the account receivable, Note 4.


ANALYSIS Classify 2. Notes Receivable, Accounts
Receivable (controlling), and Accounts
ReceivableJoe Dimaio are asset accounts.
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Section 3 Notes Receivable (cont'd.)
Chapter 26

Recording the Receipt of a Note Receivable
(cont'd.)
Business Transaction (cont'd.)

On March 1, On Your Mark sold 1,750 of
merchandise on account to Joe Dimaio. That
transaction was recorded in On Your Marks sales
journal. Joe cannot pay his account by the due
date. On April 8, On Your Mark received a 60-day,
12.5 note dated April 6 for 1,750 from Joe
Dimaio to settle the account receivable, Note 4.

ANALYSIS / 3. Notes Receivable is
increased by 1,750. Accounts Receivable
(controlling) and Accounts ReceivableJoe Dimaio
(subsidiary) are decreased by 1,750.

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Section 3 Notes Receivable (cont'd.)
Chapter 26

Recording the Receipt of a Note Receivable
(cont'd.)

Business Transaction (cont'd.)
On March 1, On Your Mark sold 1,750 of
merchandise on account to Joe Dimaio. That
transaction was recorded in On Your Marks sales
journal. Joe cannot pay his account by the due
date. On April 8, On Your Mark received a 60-day,
12.5 note dated April 6 for 1,750 from Joe
Dimaio to settle the account receivable, Note 4.


DEBIT-CREDIT RULE 4. Increases to asset accounts
are recorded as debits. Debit Notes Receivable
for 1,750.
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Section 3 Notes Receivable (cont'd.)
Chapter 26

Recording the Receipt of a Note Receivable
(cont'd.)
Business Transaction (cont'd.)

On March 1, On Your Mark sold 1,750 of
merchandise on account to Joe Dimaio. That
transaction was recorded in On Your Marks sales
journal. Joe cannot pay his account by the due
date. On April 8, On Your Mark received a 60-day,
12.5 note dated April 6 for 1,750 from Joe
Dimaio to settle the account receivable, Note 4.

DEBIT-CREDIT RULE 5. Decreases to asset accounts
are recorded as credits. Credit Accounts
Receivable (controlling) for 1,750. Also credit
Accounts Receivable Joe Dimaio (subsidiary) for
1,750.

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Section 3 Notes Receivable (cont'd.)
Chapter 26

Recording the Receipt of a Note Receivable
(cont'd.)
Business Transaction (cont'd.)

On March 1, On Your Mark sold 1,750 of
merchandise on account to Joe Dimaio. That
transaction was recorded in On Your Marks sales
journal. Joe cannot pay his account by the due
date. On April 8, On Your Mark received a 60-day,
12.5 note dated April 6 for 1,750 from Joe
Dimaio to settle the account receivable, Note 4.

T ACCOUNTS 6.
Notes Receivable Accounts Receivable
Credit
Credit 1,750
Debit 1,750
Debit

Accounts Receivable Subsidiary Ledger Accounts
ReceivableJoe Dimaio
Credit 1,750
Debit
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Section 3 Notes Receivable (cont'd.)
Chapter 26

Recording the Receipt of a Note Receivable
(cont'd.)
Business Transaction (cont'd.)

On March 1, On Your Mark sold 1,750 of
merchandise on account to Joe Dimaio. That
transaction was recorded in On Your Marks sales
journal. Joe cannot pay his account by the due
date. On April 8, On Your Mark received a 60-day,
12.5 note dated April 6 for 1,750 from Joe
Dimaio to settle the account receivable, Note 4.

JOURNAL ENTRY 7.

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Section 3 Notes Receivable (cont'd.)
Chapter 26

Recording the Receipt of Cash for a Note
Business Transaction

On June 7, On Your Mark received a check dated
June 5 for 1,785.96 from Joe Dimaio in payment
of the 1,750 note of April 6 plus interest of
35.96, Receipt 996.
Principal ? Interest Rate ? Time Interest 1
,750 ? .125 ? 60/365 35.96

JOURNAL ENTRY 7.

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Section 3 Notes Receivable (cont'd.)
Chapter 26

Check Your Understanding

Explain the similarities between a note payable
and a note receivable.