Introduction to Notes Receivable

What you will learn to do: Account for notes receivable

A pile of lumber.

A note receivable is different from an account receivable in several ways. First of all, accounts receivable arise from normal business transactions. Willamette Industries sells lumber to Home Depot. Willamette records the revenue when the lumber is shipped and a corresponding accounts receivable. On the opposite side of the transaction, Home Depot records a purchase of inventory and an account payable. These transactions are governed by the Uniform Commercial Code and often there is no other documentation or agreement other than a purchase order from Home Depot and an invoice from Willamette asking for payment.

A note receivable, on the other hand, is a written promise by a borrower to pay a definite sum of money to the lender on a specific date. A company may have notes receivable from transactions with customers, suppliers, banks, individuals, or other companies for an amount past due on an account receivable or for the sale of a large item such as a piece of equipment.

Notes receivable transactions involve issuing the note, accruing interest earned, and receiving payment of the note including interest.