Skip to main content
Pearson+ LogoPearson+ Logo
Start typing, then use the up and down arrows to select an option from the list.

Notes Receivable Definitions

Brian Krogol
Was this helpful?
Alright. So let's learn a few more details about notes receivable. So recall that a note receivable is very similar to an account receivable except that it's supported by a formal written contract. Okay. We have a formal written contract which kind of solidifies this arrangement and on top of there being this this contract, what we see is that the note receivable uh different from a. R. Right. Another difference here is that they have a maturity date. So there's gonna be a specific date where the note receivable matures and has to be paid back and they earn interest. Okay. That's a big difference there is that there's gonna be an interest rate and you're earning interest on this note receivable, you're gonna be getting interest revenue. Okay. So we have two things. We've got principle. If you've heard of loans you've probably heard these terms before. You've got the principal of the loan and this is the amount that was loaned or borrowed. Right? We've got notes receivable and notes payable. So it goes either way. The principle is that amount that's loaned or borrowed and the interest. Well that's the cost of borrowing the principal. Right? So if we lent money they're gonna pay us interest for for borrowing that money. So when we calculate interest we're gonna use a very simple formula. We're gonna have the face value of the note the principal, right? This is the principal amount. And we're gonna multiply it by this interest rate they're gonna give us an uh an interest rate in the question. So this is generally gonna have to be given And we're gonna have to multiply it by a time factor. Usually these notes receivable are for short terms for the most part when we talk about notes receivable, they're gonna be current. They're gonna be things like a note receivable that's for you know, 90 days or six months or maybe one year, nine months. Right? They're generally pretty short terms. So what happens We're not gonna earn in most cases a full year of interest. Right? If it's a 90 day note receivable, we're only going to earn interest for 90 days, not a whole year. So we're gonna have to multiply the interest rate which is usually given or which is pretty much always given as a annual amount. And we have to multiply it to give it for the actual amount the actual time period. So let's see some examples here with the interest rate. The first one, we've got a note that's $1,800 note with a 12% interest rate, annual interest rate and it's out for 90 days. So let's calculate the total interest that will be paid on this note. What we need to do is we need to multiply the principle the face value of the note times the interest rate 0.12 as a percentage, right? As a decimal. And then we have to multiply it by the time factor, right? This time factor that I mentioned. Well in this case we're not having it for a whole year, right? We're only gonna have it for a portion of the year. And when we talk about days, they usually simplify, they don't talk about 365 days. They usually just say 360 just to keep it simple double check with your professor and make sure they use 360. It just makes the math a lot simpler in these classes. So we don't get it for a whole year for a whole 360 days. We only get it for 90 out of those 360 days. Okay? So this is how we're gonna calculate the total interest on that loan. Let's see what it is, 1800 times .12. So $216 would be for an entire year. But we're only having it for 90 days of the year. So 90 times 90, divided by 360, gives us $54. All right. So you should have got $54 total interest for those 90 days outstanding. Alright, let's try the next one. So now we've got $2,000 8. But notice this time it's in months, not days and not years. So we're still gonna multiply the principal 2000 times the interest rate 8%, which is 0.08. But now we're gonna multiply by the time factor this time it's nine months, right? We still don't get a whole year's worth. We get nine months. But we're talking in months. So we're not gonna talk about 360 days anymore. We're gonna talk about 12 months. So in this case we're gonna have it for nine out of the 12 months, right? So let's see how much total interest will be earned in this case. What we've got 2000 times 20000.8. So in a whole year there would have been 100 and $60 worth of interest. But we only get 9 12 times nine, divided by 12 is 100 and $20. So there would be 100 $20 total interest in this case. All right. Last but not least. Let's try this last 1. 40 500 Times 4.5%. So don't get tripped up with the decimal there. 4.5%.. Right? 0.045 times. Well, in this case it's out for one year. Right? So it would just be one times 1/1. It's out for one full year. So, it would just be one. That doesn't matter. Alright, so 4500 times 45000.45. Did I do that right? 4500 times 45000.45. There it is $202.50. That's the total interest on that one. Alright, So that's how we calculate interest. Let's go ahead and pause real quick and then we'll discuss maturity date in the next video.