Notes Receivable

Definition

The financial accounting term notes receivable refers to the obligations of a customer that is in the form of a promissory note, which is a written promise to pay a fixed sum of money to the company.  Notes receivable appear on the balance sheet as a current asset.

Explanation

Since most accounts receivable must be paid within one year or one operating cycle, whichever is longer, notes receivable are classified as a current asset. A promissory note is an unconditional promise to repay a pre-defined sum of money at a future point in time or on demand.
 
There are two parties to any transaction:

  • Maker:  the entity signing the note, with the promise to repay
  • Payee:  the entity receiving payment from the maker

A note receivable is always recorded on the company's books at face value; even if the note charges the borrower interest.  When this note is repaid, the borrower will pay both the face value of the note (notes payable) as well as interest due (interest revenue).

Related Terms

balance sheet, current asset, discount on notes receivable, notes payable, recognition of notes receivable, long-term notes payable