Notes Receivable
Formal written promises from debtors to repay a specified principal amount plus interest by a specified date, classified as assets on the balance sheet.
What is Notes Receivable?
Notes receivable are formal, written promissory notes that obligate a third party (a customer, employee, or borrower) to pay the holder a stated principal amount plus interest at a specified future date. Unlike accounts receivable — which represent informal trade credit extended without a formal instrument — notes receivable are legally enforceable contracts. They can arise from: extending credit terms to customers who need more time to pay, making employee loans, selling assets in exchange for a note, or converting overdue accounts receivable into formal notes. Notes due within 12 months are current assets; those due later are non-current (long-term) assets. Interest on notes receivable accrues over time and is recognized as interest income under the accrual principle. Notes receivable are discounted to present value when the stated interest rate differs significantly from the market rate.
Example
A medical equipment company sells $500,000 of equipment to a hospital. Because the hospital needs 18 months to pay, the parties execute a promissory note: $500,000 principal at 6% annual interest, due in 18 months. The company records a note receivable asset of $500,000. Over the 18 months, it accrues $45,000 in interest income ($500,000 × 6% × 1.5). The hospital pays $545,000 at maturity, clearing both the note and accrued interest.