 In this discussion we will discuss the discussion question of discuss what a note receivable is and how to calculate interest due. So a note receivable is going to be a type of receivable. It is going to be an asset and that it's going to be something owed to us claim to something in the future. Typically that's something being cash in the future. The note receivable will typically happen due to some transaction in the past and it represents something owed to us often by customers. So for a business we may have notes receivable from sales that become due or possibly we convert an accounts receivable to a notes receivable. It's often useful when talking about notes receivable to compare them to accounts receivable. What's the difference in other words between a note receivable and an accounts receivable? The accounts receivable is going to be the normal type of business transaction that we use in order to make sales when we make a sale. We typically on account from make it on account. We typically debit accounts receivable and credit sales. And then if we have sale of inventory at the same time under a perpetual system debit cost to goods sold and credit the inventory. The accounts receivable then represents what we expect to be paid within a normal probably around 30 day time period. When would we want a note receivable if we made a sale of something that is larger in nature meaning the dollar amount is larger or and or we have a longer time period in which we expect to receive payment. And because of those things we possibly also want to collect interest on it. And therefore because it's because of those things because it's a greater in value because we want to collect interest on it because the time period is longer for which we expect to get paid in. We also typically have a documentation of it a written documentation a more formal documentation than we might use under accounts receivable. So under the accounts receivable then we're going to track things in a subsidiary ledger we're going to track who owes us money we're going to track who owes us money in the subsidiary ledger meaning the balance sheet will show a total of how much people owe us in the accounts receivable the general ledger will show us detail but only by date of transactions to get to that total the subsidiary ledger will break out that same information by who owes us money and that'll be very useful for a collection clearly the notes receivable then we're not going to track in that same subsidiary ledger we may track in a couple different ways we might one have a different note receivable for each note on the trial balance and track the principal at least on the trial balance or we could have one note receivable on the trial balance and then have supporting documentation that will track who owes us the money on the note receivable and calculating the interest on that note now because the note receivable is longer typically in dates and due dates more than 30 days typically than accounts receivable we might tend to think that it should be a long-term asset or not a current asset and that's not that's not necessarily the case I mean if it's over 30 days it still might be a current asset but something that's not going to be an accounts receivable so typically we'll be working with notes receivable here that are less than a year still still then current assets not non-current assets but have a longer time period than a typical accounts receivable so don't get that mixed up that's not necessarily the case that's over a year's time and therefore not a current assets to be a note receivable rather than an accounts receivable now once we have a note receivable we're going to have to calculate interest on it when we first put the note receivable on the books we don't need to know what the interest rate is or anything we can just debit notes receivable and credit sales or credit accounts receivable depending on whether we made a sale for the note receivable or if we're converting accounts receivable and then calculating interest we need to note that we're going to be dealing with simple interest here so so it's just going to be calculation of simple interest so if the interest rate say is 10 percent we're going to say whatever the note was it multiplied times the rate so if the note itself was 20 000 times 10 percent that'll give us the interest that would be due if the note was out for an entire year and that's the key point we want to keep in mind here interest typically means when stated unless stated otherwise an annual rate of interest we don't typically state interest rates in terms of a monthly rate because just by convention one and two probably the reason we have the convention is that it would be very small interest rates we would talk we'd be talking about fractions of percent rather than something that's typically between you know zero and a hundred so the interest would be a lot smaller that way so in any case whenever we hear an interest rate we typically mean an annual rate therefore we have to break down the annual interest into whatever term it is covering so for example if it was 10 percent on the 20 000 we'd have to take 20 000 times 10 and then somehow convert it to the terms if it was only a 60 day note only out for 60 days or two months we have to take that yearly amount of interest and convert it to a amount for just two months we could do that by dividing by the number of days in the in the year we could round it to 360 which would be 12 months times 30 an average of 30 days per month and that would give us a daily interest amount and then we can take that and multiply it times the number of days outstanding in the note which we said was 60 and that would give us the interest that would be due at the end of the time period so then when we collect the money we should collect the original amount that we issued the 20 000 plus the interest then we're going to credit the note to take it off the books for the 20 000 it not having included the interest yet because we haven't recorded any and then we're going to credit interest revenue for the revenue that we've earned now there's a there's a bunch of different ways we can do that same kind of calculation on interest just basically uh ordering the operations of the math a bit differently but that's going to be the basic subject just the key to the interest is just that simple interest still means annual interest that we need to then convert in some way or other to whatever the term of the note is which will typically be uh you know 60 days 100 day we're going to be dealing with notes again that are less than a year typically for the receivables so it'll usually be stated in terms of days often days that are going to be um could be broken out into multiples of 30 which would be broken out into even text months