An entity’s right to receive cash that is in a documented form is known as note receivable. Now-a-days, businesses tend to sell their goods and services on credit. They transfer the goods and services to the customers and allow the customers to pay for the goods and services later. This right to receive cash in exchange of the goods and services is recorded as a current asset known as accounts receivable. If this arrangement is documented and the customer or other party makes a promise in writing to pay the cash at a certain future date, it will be termed as note receivable.
Notes receivable are usually prepared for receivables which have a relatively greater credit term, and the amounts are substantial. As the credit period is significant, notes receivables often carry an interest, requiring the payer to pay interest at an agreed rate in addition to the principal amount. Accrued interest receivable is recognized as an asset on the balance sheet in addition to the notes receivable asset.
In addition to sale of goods or services on credit, notes receivables can also be used to document a loan arrangement. A company can lend some amount of money to another party to earn interest income and this arrangement can be documented through a note receivable. Party receiving the money promises in writing to pay the principal and interest as per agreed repayment schedule.
It is a financial instrument where one party (the issuer) promises in writing to the other party (payee) to pay a certain amount on or before a certain future date. It is a form of contract and contains all the terms and conditions such interest rate, repayment schedule etc. agreed between the issuer and the payee. Promissory notes are used to document the notes receivables and are signed by both the issuer and the payee.