 In this discussion we will discuss the discussion question of describe the journal entry for recording a note receivable and the effect on the accounting equation. So a note receivable we might first approach this type of essay questions type of discussion question by first noting what a note receivable is. We could do that by comparing it to an accounts receivable. So it is still a receivable. It's going to be an asset. It could be a current asset or a long-term asset depending on the time frame of note receivable. We might first think that the difference between a note receivable and an accounts receivable is the fact that one is going to be long-term versus short-term. But that's not necessarily the case. The notes receivable we will be using most of the time here are going to be receivable notes that have a time frame of the due day of the note being longer than a typical account receivable but not typically being over a year which is the determining factor that would typically put the note receivable into a non-current asset category. So first what's an accounts receivable? That's going to be the default standard. That's going to be something that is owed to us due to a prior transaction typically due to a sale of goods or services. So the journal entry there would be a debit to accounts receivable and a credit to some type of revenue. It would be income or revenue or it could be called sales if we sell goods or fees earned if we have a service. And then if we sell inventory we may debit cost of goods sold and credit inventory at the same time if it's a perpetual inventory system. So that's going to be the normal accounts receivable we will have. Now a note receivable we may have the same type of transaction same journal entry replacing accounts receivable with notes receivable in certain circumstances meaning the journal entry could be a debit rather than to accounts receivable to notes receivable and then a credit to sales or revenue or income or fees earned whatever we call the revenue account. And if we sell goods or services a debit to cost of goods sold and a credit to inventory why might we do this for notes receivable? Usually if the dollar amount is larger in nature if the term of payment is longer longer than a normally accounts receivables 30 days so if it's something longer than 30 days and maybe if it's something that we want to charge interest on these things of course are related if it's a larger dollar amount we may want to charge interest on it. If it's a larger dollar amount it may be that it takes longer time period to get paid on if the terms might be longer for us to be getting payment on and if the dollar amount is larger and we have terms that are longer we we probably are going to want to charge interest on it because we are in essence making a loan and for those three reasons because of the added complexity of this agreement we may want more than just a receipt or more of a like a verbal agreement that we would have under accounts receivable we might have want to have written formal documentation a document basically showing that a promise to pay is given a promise to pay in the formal documentation listing the amount of principal the interest rate and the term the time period of the note receivable that we will have. So that's going to be the normal type of transaction and an idea of what the notes receivable is and also the note receivable might go on the books instead of making a sale and replacing the note receivable or replacing the accounts receivable with a note receivable we might have a circumstance where we basically convert a receivable on accounts receivable to a notes receivable. So if for example an accounts receivable was not being paid it went past the terms the 30-day term period and we are extending the term we may then say okay we want to make a formal extension and then we'll give you a longer period of time to pay however we would like to collect interest on it and have a formal written promise of that payment that could be a circumstance where we would we would have a conversion and the journal entry would be straightforward we would debit notes receivable converting it to that asset the asset going up for notes receivable and credit reduce accounts receivable in other words we would just take it out of accounts receivable it being an asset type of account with a credit and put it into a note receivable it being an asset type account with a debit. Now again it doesn't mean that we're taking it from a current asset to a long-term asset the effect on the accounting equation would be no in us because even the effect on the current assets meaning the the asset went up and the asset went down we in that case so the account the assets would remain the same in net no effect on liabilities no effect on the equity when we make a sale it would have the accounting equation would have the same effect as it would if we made a sale and used accounts receivable meaning if we debit accounts receivable and we credit sales then the assets are going up because accounts receivable is going up and the other side of the accounting equation would be equity equity would be going up because sales are going up that brings net income up net income brings equity up