1. Section 3Notes Receivable What You’ll Learn  How to record the issuance of a note receivable.  How to record payments on a note receivable. What You’ll Learn  How to record the issuance of a note receivable.  How to record payments on a note receivable.

2. Why It’s Important Many businesses accept notes receivable and receive payments on those notes. Why It’s Important Many businesses accept notes receivable and receive payments on those notes. Key Terms  other revenue Key Terms  other revenue Section 3Notes Receivable (cont'd.)

3. Accounting for Notes Receivable  Promissory notes that a business accepts from customers are called notes receivable.  Notes Receivable is an asset account, and its normal balance is a debit.  The interest earned on a note receivable is recorded in a revenue account called Interest Income.  Promissory notes that a business accepts from customers are called notes receivable.  Notes Receivable is an asset account, and its normal balance is a debit.  The interest earned on a note receivable is recorded in a revenue account called Interest Income. Section 3Notes Receivable (cont'd.)

4. Business Transaction On March 1, On Your Mark sold $1,750 of merchandise on account to Joe Dimaio. That transaction was recorded in On Your Mark’s sales journal. Joe cannot pay his account by the due date. On April 8, On Your Mark received a 60-day, 12.5% note dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4. ANALYSIS Identify1.The accounts affected are Notes Receivable, Accounts Receivable (controlling), and Accounts Receivable—Joe Dimaio (subsidiary). Recording the Receipt of a Note Receivable

5. Section 3Notes Receivable (cont'd.) Business Transaction (cont'd.) On March 1, On Your Mark sold $1,750 of merchandise on account to Joe Dimaio. That transaction was recorded in On Your Mark’s sales journal. Joe cannot pay his account by the due date. On April 8, On Your Mark received a 60-day, 12.5% note dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4. Recording the Receipt of a Note Receivable (cont'd.) ANALYSIS Classify2.Notes Receivable, Accounts Receivable (controlling), and Accounts Receivable—Joe Dimaio are asset accounts.

6. Section 3Notes Receivable (cont'd.) Business Transaction (cont'd.) On March 1, On Your Mark sold $1,750 of merchandise on account to Joe Dimaio. That transaction was recorded in On Your Mark’s sales journal. Joe cannot pay his account by the due date. On April 8, On Your Mark received a 60-day, 12.5% note dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4. Recording the Receipt of a Note Receivable (cont'd.) ANALYSIS + / –3.Notes Receivable is increased by $1,750. Accounts Receivable (controlling) and Accounts Receivable—Joe Dimaio (subsidiary) are decreased by $1,750.

7. Section 3Notes Receivable (cont'd.) Business Transaction (cont'd.) On March 1, On Your Mark sold $1,750 of merchandise on account to Joe Dimaio. That transaction was recorded in On Your Mark’s sales journal. Joe cannot pay his account by the due date. On April 8, On Your Mark received a 60-day, 12.5% note dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4. Recording the Receipt of a Note Receivable (cont'd.) DEBIT-CREDIT RULE 4.Increases to asset accounts are recorded as debits. Debit Notes Receivable for $1,750.

8. Section 3Notes Receivable (cont'd.) Business Transaction (cont'd.) On March 1, On Your Mark sold $1,750 of merchandise on account to Joe Dimaio. That transaction was recorded in On Your Mark’s sales journal. Joe cannot pay his account by the due date. On April 8, On Your Mark received a 60-day, 12.5% note dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4. Recording the Receipt of a Note Receivable (cont'd.) DEBIT-CREDIT RULE 5.Decreases to asset accounts are recorded as credits. Credit Accounts Receivable (controlling) for $1,750. Also credit Accounts Receivable— Joe Dimaio (subsidiary) for $1,750.

9. Section 3Notes Receivable (cont'd.) Business Transaction (cont'd.) T ACCOUNTS 6. Notes Receivable Accounts Receivable Debit + 1,750 Credit – Credit – 1,750 Debit + Recording the Receipt of a Note Receivable (cont'd.) On March 1, On Your Mark sold $1,750 of merchandise on account to Joe Dimaio. That transaction was recorded in On Your Mark’s sales journal. Joe cannot pay his account by the due date. On April 8, On Your Mark received a 60-day, 12.5% note dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4. Accounts Receivable Subsidiary Ledger Accounts Receivable—Joe Dimaio Debit + Credit – 1,750

10. Section 3Notes Receivable (cont'd.) Business Transaction (cont'd.) JOURNAL ENTRY 7. Recording the Receipt of a Note Receivable (cont'd.) On March 1, On Your Mark sold $1,750 of merchandise on account to Joe Dimaio. That transaction was recorded in On Your Mark’s sales journal. Joe cannot pay his account by the due date. On April 8, On Your Mark received a 60-day, 12.5% note dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4.

11. Section 3Notes Receivable (cont'd.) Business Transaction JOURNAL ENTRY 7. On June 7, On Your Mark received a check dated June 5 for $1,785.96 from Joe Dimaio in payment of the $1,750 note of April 6 plus interest of $35.96, Receipt 996. Recording the Receipt of Cash for a Note Principal  Interest Rate  Time=Interest $1,750 .125  60/365=$35.96

12. Check Your Understanding Explain the similarities between a note payable and a note receivable. Section 3Notes Receivable (cont'd.)