Companies often offer credit to their buyers. Credit may be offered in two ways. On selling goods on a long term credit to a customer who premises to pay money on or before a predefined date, it is termed as notes receivable. If the company sells goods or provides services but is yet to collect payment against the same, it is termed as account receivable. Here, we’ll differentiate accounts receivable vs. notes receivable.
In accounting language the company extending credit against a note receivable is called payee of the note and would account for this amount as note receivable whereas the client who needs to pay against that note is called maker of the note. The maker accounts for amount as note payable. Notes receivable carry interest charges, the face or recorded value of note is the primary sum of credit offered.
Notes receivable may be short term or long term. It is called a short term note when the maker of the note promises to pay the dues in a span of less than one year. The payee accounts for this short term note receivable as a short term asset in its balance sheet. However, if the time for making payment against the note goes beyond one year, it’s known as a long term note receivable. It is recorded as a long term asset in the balance sheet of the payee. Accountants may talk about short-term notes as current notes receivable and long-term notes as non-current notes receivable.
When a company sells goods or provides services bills the buyer of goods or services later, we call it as an account receivable. For instance, a company may hire lawn mowing services from a provider, who provides the required services on the 1st of the month but bills the buyer of services on the 20th of that month, much after the services were provided. The company which provided services accounts for the amount as account receivable in the general ledger whereas the buyer or the company which availed of the services accounts for the amount as an account payable.
Accounts Receivable Terms
Generally, accounts receivable are short term assets as the amount is payable within one year. If the company doesn’t collect payment against accounts receivable. The amount is written off as a bad debt. It’s called a straight write off. Another way is to write off the debt by allowance method. In case of straight write off, the seller writes of the definite amount receivable which remained unpaid. On following the allowance method of writing off, the seller approximates the sum of accounts receivables that it expects not to be paid.
So, those are the differences when accounting for accounts receivable vs. notes receivable.