Maturity value is the amount that the company (maker) must pay on a note on its maturity date; typically, it includes principal and accrued interest, if any. Since the note has matured, the holder or payee removes the note from Notes Receivable and records the amount due in Accounts Receivable. Sometimes the maker of a note does not pay the note when it becomes due. The $18,675 paid by Price to Cooper is called the maturity value of the note. Maturity value is the amount that the company (maker) must pay on a note on its maturity date; typically, it includes principal and accrued interest, if any.

Notes receivable accounting

(b)”Four months after date, I promise to pay…” When the maturity is expressed in months, the note matures on the same date in the month of maturity. For example, one month from July 18 is August 18, and two months from  July 18 is  September 18. If a note is issued on the last day of a month and the month of maturity has fewer days than the month of issuance, the note matures on the last day of the month of maturity. For example, one month from July 18 is August 18, and two months from July 18 is September 18. Some companies will issue zero-interest-bearing notes as a sales incentive. Even though the interest rate is not stated, the implied interest rate can be derived because the cash values lent and received are both known.

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Both accounts receivable and notes receivable can be used to generate immediate cash. If the note extends beyond one period, interest is recorded at the maturity date or at the end of the accounting period using an adjusting entry. As a quick note, in this article we are mainly concerned with accounting for notes receivable; however, the concepts that we will consider apply equally well to notes payable. In this case the note receivable is issued to replace an amount due from a customer currently shown as accounts receivable. A customer will issue a note receivable if for example, it wants to extend its payment terms on an overdue account with the business.

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• Where I/Y is interest of .75% each month (9%/12 months) for six months.
• Note that some textbooks use 360 days in a year, and some textbooks use 365 days in a year.
• This is because not all the sales made to a particular customer are recorded in the customer’s subsidiary accounts receivable ledger.
• Finally, at the end of the 3 month term the note receivable is honored by the customer together with the accrued interest, and the following journal completes the transaction.

This will be illustrated when non-interest-bearing long-term notes receivable are discussed later in this chapter. Assuming the customer makes the repayment to ABC Co.’s bank account, ABC Co. can use the following journal entry to record the receipt. As mentioned above, the company must determine, using the timeframe of the note receivable, whether it classifies as a current asset or non-current. For note receivable, the timeframe is before or on which the maker must reimburse the holder. Unlike other loans, note receivables do not usually come with prepayment penalties.

Written by True Tamplin, BSc, CEPF®

Cash or bank is debited by the sum of principal amount and interest not yet received. Interest receivable account is credited where the note carries simple interest. Interest income account is credited when the interest received has not been recognized already.

The future amount can be a single payment at the date of maturity or a series of payments over future time periods or some combination of both. To illustrate notes receivable scenarios, let’s invoice template for excel return to Billie’s Watercraft Warehouse (BWW) as the example. BWW has a customer, Waterways Corporation, that tends to have larger purchases that require an extended payment period.

It is common knowledge that money deposited in a savings account will earn interest, or money borrowed from a bank will accrue interest payable to the bank. The present value of a note receivable is therefore the amount that you would need to deposit today, at a given rate of interest, which will result in a specified future amount at maturity. The cash flow is discounted to a lesser sum that eliminates the interest component—hence the term discounted cash flow.

This is treated as an asset by the holder of the note, and a liability by the borrower. Overdue accounts receivable are sometimes converted into notes receivable, thereby giving the debtor more time to pay, while also sometimes including a personal guarantee by the owner of the debtor entity. The guarantee provision makes the note receivable easier to collect than a standard account receivable.