Notes Receivable vs Accounts Receivable Explained

Notes receivable are amounts owed to a business under a formal written promissory note that states the principal, interest rate, and maturity date. Accounts receivable are amounts customers owe for goods or services sold on credit, supported by an invoice and usually due within 30 to 90 days without interest. Both are assets, but they differ in documentation, interest, timing, and legal strength.

What Is a Note Receivable in Accounting?

A note receivable is a written, signed promise from a borrower or customer to pay a specific amount, usually with interest, on a specific date or in installments. The company holding the note records it as an asset. The note states the principal, interest rate, maturity date, payment schedule, and the consequences of default.

Notes receivable arise from loans to customers, employees, or other parties, from the sale of assets on credit, and from converting overdue customer balances into formal payment agreements.

Accounts Receivable Defined

Accounts receivable is the money customers owe a business for goods or services delivered on credit in its normal operations. It is created when an invoice is issued and settled when the customer pays. Accounts receivable is usually unsecured, interest free, and due on standard payment terms such as net 30.

6 Key Differences Between Notes Receivable and Accounts Receivable

The six key differences are the type of documentation, whether interest is charged, the length of the term, balance sheet classification, legal enforceability, and how often each arises in normal business.

Documentation: Accounts receivable rely on the invoice and agreed payment terms. Notes receivable rely on a promissory note signed by the debtor.

Interest: Notes receivable typically carry an interest rate that compensates the lender for waiting. Trade accounts receivable usually do not, although late payment fees may apply under the payment terms.

Term: Accounts receivable are short term. Notes receivable can run for a few months or several years, sometimes with installment payments.

Classification: Accounts receivable are current assets. Notes receivable due within one year are current; the portion due later is non-current. The classification rules are the same as those used to decide whether accounts receivable is a current or non-current asset.

Legal strength: A signed note is a clear, formal obligation that is usually easier to enforce than an open invoice, and notes can sometimes be transferred or sold.

Frequency: Accounts receivable arise with every credit sale. Notes receivable arise only when a specific loan or formal agreement is made.

Where Each Appears on the Balance Sheet

Accounts receivable appear in current assets, net of an allowance for credit losses. Notes receivable appear in current assets if due within twelve months and in non-current assets if due later, with any interest earned but not yet received shown as interest receivable. Both are reduced by allowances for expected credit losses.

Many balance sheets combine the two as "accounts and notes receivable, net." Accounts receivable itself is one of several categories alongside trade, non-trade, and other balances described in types of accounts receivable.

Notes Receivable Accounting: Journal Entries

Notes receivable accounting involves recording the note at its principal amount, accruing interest as it is earned, and recording the cash received at maturity. When an overdue account receivable is converted into a note, the account receivable is removed and the note receivable is recorded in its place.

Example. A customer cannot pay a $10,000 overdue invoice and signs a 6-month, 6% note for the full amount.

Converting the account receivable into a note receivable:

Accruing interest at a period end three months later ($10,000 × 6% × 3/12 = $150):

Collecting the note at maturity, with total interest of $300:

The conversion entry follows the same debit and credit logic as other accounts receivable journal entries, with interest recorded separately as it is earned.

Dishonored Notes Receivable

A dishonored note is one the debtor fails to pay at maturity. The company removes the note and records the full amount owed, including earned interest, back as an account receivable, then continues collection efforts. If collection later fails, the balance is written off against the allowance for credit losses.

Using the example above, if the customer fails to pay at maturity:

Converting Overdue Accounts Receivable Into a Note

Converting an overdue account into a note receivable formalizes a payment plan, adds interest to compensate for the delay, and creates a stronger written obligation. It is common when a valued customer has a temporary cash problem and both sides want to keep the relationship.

Before agreeing a note, credit teams usually review the customer's risk, payment history, and financial position, and confirm that the arrangement fits the company's accounts receivable credit policy. Notes should be signed, specify a clear schedule, and state what happens on default. Customer risk scoring and payment behavior tracked through credit management help decide whether a note is a sensible option or a delay of an inevitable write-off.

When to Use Each

Accounts receivable are the right tool for routine credit sales on standard terms. Notes receivable are better suited to large balances, extended payment arrangements, loans to customers or other parties, and sales of assets on credit, where a formal written agreement with interest provides stronger protection.

Frequently Asked Questions