Section 3 Notes Receivable

1. Chapter 26 $ Section 3 Notes Receivable $ • What You’ll Learn • How to record the issuance of a note receivable. • How to record payments on a note receivable. $ $

2. Section 3 Notes Receivable (cont'd.) Chapter 26 $ Why It’s Important Many businesses accept notes receivable and receive payments on those notes. $ $ • Key Terms • other revenue $

3. Section 3 Notes Receivable (cont'd.) Chapter 26 $ 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. $ $ $

4. Section 3 Notes Receivable (cont'd.) Chapter 26 $ Recording the Receipt of a Note Receivable 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. $ ANALYSISIdentify 1. The accounts affected are Notes Receivable, Accounts Receivable (controlling), and Accounts Receivable—Joe Dimaio (subsidiary). $

5. Section 3 Notes Receivable (cont'd.) Chapter 26 $ Recording the Receipt of a Note 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. $ $ ANALYSISClassify 2.Notes Receivable, Accounts Receivable (controlling), and Accounts Receivable—Joe Dimaio are asset accounts.

6. Section 3 Notes Receivable (cont'd.) Chapter 26 $ Recording the Receipt of a Note 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. $ 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 3 Notes Receivable (cont'd.) Chapter 26 $ Recording the Receipt of a Note 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. $ $ DEBIT-CREDIT RULE4. Increases to asset accounts are recorded as debits. Debit Notes Receivable for $1,750.

8. Section 3 Notes Receivable (cont'd.) Chapter 26 $ Recording the Receipt of a Note 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. $ DEBIT-CREDIT RULE5. 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 3 Notes Receivable (cont'd.) Chapter 26 $ Recording the Receipt of a Note 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. $ T ACCOUNTS6. Notes Receivable Accounts Receivable Credit – Credit – 1,750 Debit + 1,750 Debit + $ Accounts Receivable Subsidiary Ledger Accounts Receivable—Joe Dimaio Credit – 1,750 Debit +

10. Section 3 Notes Receivable (cont'd.) Chapter 26 $ Recording the Receipt of a Note 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. $ JOURNAL ENTRY7. $

11. Section 3 Notes Receivable (cont'd.) Chapter 26 $ Recording the Receipt of Cash for a Note Business Transaction $ 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. Principal  Interest Rate  Time = Interest $1,750  .125  60/365 = $35.96 $ JOURNAL ENTRY7. $

12. Section 3 Notes Receivable (cont'd.) Chapter 26 $ Check Your Understanding $ Explain the similarities between a note payable and a note receivable. $ $