Notes Receivable: Recognition and Journal Entries

Notes receivable are amounts owed to a business under a signed, written promise to pay, usually with interest. They are assets, reported as current or long-term based on when cash will be collected. The holder records interest revenue as it is earned. Long-term notes are initially measured at present value and subsequently reported at amortized cost, less any allowance for credit losses.

This guide is for Intermediate Accounting students and CPA candidates studying the Financial Accounting and Reporting (FAR) section. You will learn how to record a note, accrue interest, collect or dispose of it, and estimate credit losses. All examples are hypothetical and assume ordinary notes held at amortized cost with no loan fees. Amortized cost is the amount originally recorded, adjusted for cash collected and any discount or premium amortized so far.

What Is a Note Receivable?

A promissory note identifies the amount due and payment terms. The borrower is the maker; the lender or seller entitled to receive payment is the payee. The same contract is a note payable for the maker and a note receivable for the payee.

A note may arise from a cash loan, a sale of property, or a customer replacing an unpaid invoice with a formal payment promise. Converting an existing account receivable into a note does not create a second sale. For the broader classification, review trade and nontrade receivables.

Notes Receivable vs. Accounts Receivable

Both are amounts owed to a business. The difference is mostly about formality, interest, and timing.

For more on open-account balances, see what accounts receivable means and how collections work.

How Are Notes Receivable Recognized?

Present value is what future cash is worth today. For a simple long-term interest-bearing note, it includes both the principal payment and the interest payments. Discount those cash flows using the appropriate market yield at inception. If the stated rate equals that yield, the present value equals face value.

When the stated rate is lower than the market yield, the note begins at a discount. When it is higher, the note begins at a premium. The difference is then amortized with the effective-interest method, which spreads it over the note’s life.

A note with no stated interest can still contain a financing return. The lender may advance less cash than it will receive later. See noninterest-bearing notes receivable and implied interest for that situation.

Notes Receivable Journal Entries: A Par Note

Hypothetical example: On January 1, Year 1, Cedar Company lends $18,000 for two years. The note pays 8% interest each December 31, and comparable notes also yield 8%. Cedar records it at face value, also called par, because the two rates agree.

The annual interest is $18,000 × 8% = $1,440. Returning the $18,000 principal reduces the asset; it is not interest revenue. Because the note was issued at par, no discount or premium must be amortized.

Accrued interest before payment

If Cedar also prepares statements on June 30, Year 1, it has earned six months of interest even though the borrower pays in December. Cedar debits Interest Receivable $720 and credits Interest Revenue $720: $18,000 × 8% × 6/12.

Assuming no reversing entry, the December receipt then debits Cash $1,440 and credits Interest Receivable $720 and Interest Revenue $720. This clears the amount already accrued and recognizes only the remaining six months. Do not record another $1,440 of revenue after already recognizing $720.

What Are the Journal Entries for a Short-Term Note Receivable?

A short-term customer note due on customary terms within about one year is usually recorded at face value. You skip the present value step and focus on simple interest.

Interest = Face amount × Annual rate × Time

Maturity value is the principal plus the interest due on the maturity date.

Hypothetical example: On October 1, Year 1, Birch Supply accepts a $6,000, six-month, 10% note from a customer to replace an unpaid invoice. Assume 10% is a fair rate for this customer. Birch’s year ends December 31.

The table below assumes collection at maturity. The dishonor and sale examples that follow illustrate separate alternative outcomes for the same original note.

Total interest is $6,000 × 10% × 6/12 = $300, so the maturity value is $6,300. Half was earned in each year. No new sale is recorded when the note replaces the invoice.

If a note runs in days, use the day count and year basis given. A $10,000, 60-day, 9% note earns $150 on a 360-day year: $10,000 × 9% × 60/360.

What happens if a note is dishonored?

A dishonored note is one the maker fails to pay at maturity. Assume instead that the customer does not pay on April 1, but Birch still expects to collect. Birch debits Accounts Receivable $6,300 and credits Notes Receivable $6,000, Interest Receivable $150, and Interest Revenue $150.

Birch reclassifies the principal and earned interest to Accounts Receivable; the customer still owes the money. If Birch does not expect to collect, it writes the balance off against the allowance for credit losses.

What happens if a note is sold?

A company may sell a note to get cash before maturity. Assume instead that Birch sells the note to a bank on January 1, Year 2 for $6,100, and the transfer qualifies as a sale under ASC 860. Birch debits Cash $6,100 and Loss on Sale of Note $50, then credits Notes Receivable $6,000 and Interest Receivable $150.

The $50 loss is the $6,150 carrying amount of the note and accrued interest, minus the $6,100 cash received.

How Are Notes Receivable Valued?

The time value of money and the risk of nonpayment answer different questions. A discount allocates a financing return over time. An allowance for credit losses estimates amounts that will not be collected. A note can require both adjustments.

Under the expected-credit-loss model applicable to ordinary notes at amortized cost, an allowance reduces the recorded asset to the net amount expected to be collected. Estimates consider relevant historical experience, present conditions, and reasonable and supportable forecasts. The FASB credit-loss overview explains this measurement principle.

ASU 2025-05 added relief for current accounts receivable and current contract assets from ASC 606 customer contracts, effective for annual periods beginning after December 15, 2025. Eligible entities may elect a practical expedient that assumes conditions at the balance-sheet date remain unchanged over the remaining lives of those assets when estimating credit losses. A cash loan like Cedar’s is outside that relief.

Hypothetical valuation example: A short-term note has a $12,000 amortized cost and no remaining interest discount. Management estimates $450 of expected credit losses. If the allowance previously had a zero balance, debit Credit Loss Expense $450 and credit Allowance for Credit Losses $450. The net reported amount is $11,550.

With an existing allowance, record the adjustment needed to reach the required ending balance. Do not automatically expense the entire new estimate. A signed note does not guarantee collection. See how the allowance method works and how to record a bad debt write-off.

Market rates will move after a note is issued, but a note at amortized cost is not remeasured just because they changed. Fair value disclosures under ASC 825-10 depend on the entity and the instrument, so check which requirements apply.

Common Mistakes

• Recording every long-term note at its face amount without examining interest terms.
• Using the stated rate to calculate effective-interest revenue on a discounted note.
• Recognizing principal collections as new revenue.
• Combining the interest discount and credit-loss allowance as though they represent the same adjustment.
• Forgetting to accrue interest earned but not yet collected at year-end.
• Recording a second sale when a note replaces an account receivable.
• Leaving a dishonored note in Notes Receivable after its maturity date.

Where Do Notes Receivable Show Up on the CPA Exam?

The AICPA’s FAR Blueprint does not list notes receivable as its own topic. The 2026 Blueprint lists trade receivables under Area II, Select Balance Sheet Accounts, which makes up 30% to 40% of the section. It also covers related ideas such as financial assets at amortized cost. Blueprint tasks are representative, not a complete list of what can be tested.

The 2027 Blueprints take effect January 1, 2027, so use the version that matches your exam date. For more FAR practice, try the CPA Test Bank.

Practice Questions and Explanations

1. Calculate an accrual

A $15,000 note issued at par carries 6% annual interest. Four months have passed without payment. How much interest revenue is earned?

2. Identify the initial amount

A two-year note has a $25,000 face amount. Its stated rate equals the appropriate market rate. Ignore fees and credit losses. What is its initial carrying amount?

3. Adjust the allowance

A $9,000 note requires an ending credit-loss allowance of $360. The existing allowance has a $100 credit balance. What expense is recorded?

4. Calculate maturity value

An $8,000, 90-day, 6% note uses a 360-day year. What is its maturity value?

Answer: $8,120. Interest is $8,000 × 6% × 90/360 = $120. Add that to the $8,000 principal.

Key Takeaways

• A note receivable is an asset backed by a signed, written promise to pay.
• Long-term notes start at present value. Face value applies when the stated rate equals the market rate.
• Interest revenue is earned over time, not only when cash arrives.
• Replacing an invoice with a note does not create a second sale.
• A dishonored note leaves Notes Receivable. If the holder still expects to collect, the amount moves to Accounts Receivable.
• A discount is about timing. An allowance is about credit risk.

Frequently Asked Questions

Are notes receivable always long-term?

No. A note due within one year is generally a current asset. A trade note can also be current if it is due within a longer normal operating cycle. Any part due after that is long-term.

Is interest receivable the same as notes receivable?

No. Interest receivable generally tracks earned interest not yet collected. Notes receivable tracks the contractual note balance.

Does a note with no stated rate earn interest revenue?

Often, yes. If the borrower will repay more than the note’s initial present value, the difference is implied interest, and the holder recognizes it over the note’s life. Normal customer receivables due on customary terms within about one year usually skip this step.

Is notes receivable a debit or a credit?

A debit. Notes Receivable is an asset account, so it increases with a debit and decreases with a credit. The maker records the same note as a liability, Notes Payable.

What happens if a note receivable is not paid?

The note is dishonored. If the holder still expects to collect, it moves the principal and earned interest out of the note accounts and into Accounts Receivable. If it does not expect to collect, it writes the balance off against the allowance for credit losses.

Accounting References

Consult the FASB Accounting Standards Codification: ASC 835-30 for imputed interest and note discounts, ASC 326-20 for credit losses on amortized-cost financial assets, and ASC 825-10 for applicable financial-instrument disclosures. These introductory examples exclude specialized lending arrangements and fair-value elections.

ASC 860 covers transfers of financial assets, such as selling a note. ASU 2025-05 added the credit-loss relief for current accounts receivable and current contract assets.

Last reviewed: November 2026.

For more worked examples and practice, explore the Intermediate Accounting course.

About the Author

Mansour Farhat, CPA, CIA, DBA, is an accounting educator and the founder of Farhat Lectures. He earned his DBA from Temple University and his Master of Accountancy from Bloomsburg University. He helps learners from their first accounting course through the CPA, CMA, and EA exams.