CENTURY 21 ACCOUNTING © Thomson/South-Western

LESSON 20-3LESSON 20-3

Notes Receivable

Obj. 5.01 – Apply procedures to prepare journal entries for notes payable & notes receivable transactions

Original created by M.C. McLaughlin, Thomson/South-WesternModified by Deborah L. Burns, Johnston County Schools, West Johnston High School

CENTURY 21 ACCOUNTING © Thomson/South-Western

NOTES RECEIVABLENOTES RECEIVABLE

A customer who is unable to pay an account on the due date may request additional time The business should require the customer to sign a note The promissory note is a written confirmation of the debt,

which provides evidence in case legal action is required to collect

Promissory notes that a business accepts from customers are called notes receivable

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LESSON 20-3

Notes receivable are usually paid within on year and are classified as current assets

CENTURY 21 ACCOUNTING © Thomson/South-Western

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LESSON 20-3

ACCEPTING A NOTE RECEIVABLE FROM ACCEPTING A NOTE RECEIVABLE FROM A CUSTOMERA CUSTOMER

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April 14. Accepted a 90-day, 8% note from Martin Sterling for an extension of time on his account, $3,000.00. Note Receivable No. 9.

1. Debit to Notes Receivable

2. Credit to Accounts Receivable

•When a customer signs a note, the principal amount is debited to an asset account titled Notes Receivable

•One asset is replaced by another asset

CENTURY 21 ACCOUNTING © Thomson/South-Western

COLLECTING PRINCIPAL AND INTEREST COLLECTING PRINCIPAL AND INTEREST ON A NOTE RECEIVABLEON A NOTE RECEIVABLE

When a note receivable reaches its maturity date, the payee receives the maturity value from the maker

The interest earned on money loaned is called interest income

The interest earned on a note receivable is credited to a revenue account titled Interest Income

Interest income is investment revenue and is listed in a classification titled Other Revenue

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LESSON 20-3

CENTURY 21 ACCOUNTING © Thomson/South-Western

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LESSON 20-3

COLLECTING PRINCIPAL AND INTEREST COLLECTING PRINCIPAL AND INTEREST ON A NOTE RECEIVABLEON A NOTE RECEIVABLE

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page 599

July 13. Received cash for the maturity value of Note Receivable No. 9, a 90-day, 8% note: principal, $3,000.00, plus interest, $60.00; total, $3,060.00. Receipt No. 562.

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1. Write the date.

2. Write the account title.

5. On the next line, write the account title.

3. Write the receipt number. 6. Calculate and write the interest income amount.4. Write the principal amount.

7. Write the maturity value.

CENTURY 21 ACCOUNTING © Thomson/South-Western

RECORDING A DISHONORED NOTE RECORDING A DISHONORED NOTE RECEIVABLERECEIVABLE

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LESSON 20-3

A note that is not paid when due is called a dishonored noteThe amount of the dishonored note receivable should be removed from the notes receivable accountThe amount of the note plus interest income earned on the note is still owed by the customer and should be debited to the accounts receivable account The dishonored note is not written off until all collection actions have been completedOne asset account, Notes Receivable, is replaced with another asset account, Accounts Receivable

CENTURY 21 ACCOUNTING © Thomson/South-Western

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LESSON 20-3

RECORDING A DISHONORED NOTE RECORDING A DISHONORED NOTE RECEIVABLERECEIVABLE

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May 6. Jill Davis dishonored Note Receivable No. 12, a 90-day, 8% note, maturity value due today: principal, $600.00; interest, $12.00; total, $612.00. Memorandum No. 92.

1. Debit to Accounts Receivable

2. Credit to Notes Receivable

3. Credit to Interest Income

CENTURY 21 ACCOUNTING © Thomson/South-Western

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LESSON 20-3

TERMS REVIEWTERMS REVIEW

notes receivable interest income dishonored note

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