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Lesson 3 of 9Accounting for Assets
Unit 2 · Lesson 3 of 9

Notes Receivable and Interest

A note receivable is a written promise to pay a principal plus interest on a set maturity date; the payee records interest as principal × rate × days/365, accrues any interest earned by year end, and records the note as honoured or dishonoured at maturity.

5 min read1 quick check9 practice questionsAsk AI about this →

Key things to remember

  1. 1Interest = Principal × Rate × Days/365. The rate is always annual.
  2. 2Maturity value = Principal + Interest for the full term.
  3. 3To find the maturity date, skip the issue day, count the maturity day, and work month by month.
  4. 4Converting an account: debit Notes Receivable, credit Accounts Receivable. No revenue.
  5. 5Year-end accrual: debit Interest Receivable, credit Interest Revenue for the days held so far.
  6. 6Dishonoured note: debit Accounts Receivable for the full maturity value; credit Notes Receivable, Interest Receivable and Interest Revenue.

Suppose a customer owes $6,000, is already 30 days late, and says it can pay in three months. The business can keep waiting on an open account that earns nothing, or it can ask the customer to sign a formal written promise: pay $6,000 plus interest on a specific date. That written promise is a promissory note. For the business that holds it, the note is a note receivable. It is a stronger claim than an ordinary account because it is a written, legally enforceable promise with a fixed date, and it earns interest to compensate the business for waiting.

The parts of a promissory note

PROMISSORY NOTE$6 000.00Toronto, Ontario, March 15, 2026Ninety days after date, I promise to pay to theorder of Lakeshore Supply Ltd. the sum of sixthousand dollars, with interest at 8% per year.M. PatelsignaturePrincipal$6 000Term90 daysMakerM. Patel (owes)Date of issueMarch 15, 2026PayeeLakeshore SupplyInterest rate8% per yearMaturity date16 days left in March + 30 (April) + 31 (May) + 13 (June) = 90→ June 13, 2026InterestPrincipal × rate × days/365 = $6 000 × 8% × 90/365 = $118.36Maturity valuePrincipal + interest = $6 000 + $118.36 = $6 118.36Payee's entry on June 13, when Patel pays:DrCrCash6 118.36Notes Receivable6 000.00Interest Revenue118.36
Fig 1A promissory note names the maker and payee and states the principal, interest rate, term and date; together they fix the maturity date and maturity value.
TermMeaningNorthshore example
MakerThe party that promises to pay (the debtor)R. Singh Adventures
PayeeThe party that will be paid (the creditor)Northshore Outfitters
Principal (face value)The amount borrowed or owed, before interest$6,000.00
Interest rateAn ANNUAL percentage6% per year
TermHow long until the note is due90 days
Date of noteThe day the note startsNovember 1, 2026
Maturity dateThe day the principal and interest are dueJanuary 30, 2027
Maturity valuePrincipal + total interest$6,088.77
Northshore Outfitters converts R. Singh Adventures' overdue account to a 90-day, 6% note.

The rate on a note is always an annual rate, so it must be scaled to the length of the note. This course uses a 365-day year. For R. Singh: so the maturity value is If a term is given in months instead of days, use months over 12: a 4-month note uses and matures on the same day of the month, four months later.

Counting days to the maturity date
Do not count the day the note is dated, but do count the maturity day. Work month by month: November 1 leaves 29 more days in November (30 − 1). December adds 31, for 60 days so far. The remaining 30 days run into January, so the note matures on January 30, 2027.
Quick checkTry it before you read on
1
A 60-day note is dated June 15. What is its maturity date?

Recording a note from start to maturity

A note often starts when an overdue account is converted. The customer still owes the same amount, so the entry simply moves the debt from Accounts Receivable to Notes Receivable (and the customer's subsidiary account is closed). No revenue is recorded, because the original sale was already recorded. A note can also be accepted directly in exchange for goods, in which case the debit is Notes Receivable instead of Accounts Receivable in the sale entry.

If the note is still outstanding at year end, the business has earned interest that it has not yet received. Under accrual accounting that interest belongs in the year it was earned, so an adjusting entry records it. R. Singh's note has been held for 60 days by December 31 (29 in November + 31 in December), so accrued interest is The remaining 30 days earn in 2027, and , the full interest.

DateAccountDebitCredit
2026 Nov 1Notes Receivable$6,000.00
Accounts Receivable — R. Singh Adventures$6,000.00
Dec 31Interest Receivable$59.18
Interest Revenue$59.18
2027 Jan 30Cash$6,088.77
Notes Receivable$6,000.00
Interest Receivable$59.18
Interest Revenue$29.59
Convert the account, accrue 60 days of interest at year end, then collect the maturity value. The 2027 credit to Interest Revenue is only the 30 days earned in 2027.
VideoShows how to count the days on a note and accrue interest revenue at year-end, then record collection at maturity.Watch on YouTube

Honoured and dishonoured notes

A note is honoured when the maker pays the maturity value on time, as in the January 30 entry above. A note is dishonoured when the maker fails to pay at maturity. The note itself has expired, but the debt has not disappeared: the maker now owes the principal plus all the interest earned. So the business removes the note and the interest receivable, records the interest earned in the current year, and moves the whole maturity value back to the customer's account receivable. From there it can be collected, renegotiated, or eventually written off against the allowance.

DateAccountDebitCredit
2027 Jan 30Accounts Receivable — R. Singh Adventures$6,088.77
Notes Receivable$6,000.00
Interest Receivable$59.18
Interest Revenue$29.59
If R. Singh dishonours the note, the full maturity value of $6,088.77 returns to Accounts Receivable.
Why record interest on a dishonoured note
The interest was legally earned whether or not the maker pays, and the customer's account should show the full amount owed. If the business later decides it cannot collect, it writes off the whole $6,088.77 against the allowance, just like any other bad account.
VideoWhen a maker does not pay, the note and its interest move back into Accounts Receivable; watch why the interest is still recorded.Watch on YouTube

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1
On March 10, 2026, Northshore sells kayaks to Kawartha Paddle Club and accepts a 60-day, 7% note for $4,500 (the HST is included in the note). Find the maturity date, the interest and the maturity value, and journalize the collection when the note is honoured. Ignore the cost of goods sold entry.
Example 2
On December 1, 2026, a customer's overdue $10,000 account is converted to a 45-day, 9% note. The year end is December 31. Journalize the conversion, the year-end accrual, and the collection at maturity.
Example 3
Northshore holds a 120-day, 5% note for $8,000 dated May 4, 2026. The maker fails to pay at maturity. Find the maturity date and maturity value, and journalize the dishonour.

Where marks get lost

  • Using the annual rate without scaling it for time: $6,000 × 6% is a year's interest, not 90 days' interest.
  • Counting the date of the note as day 1, which makes the maturity date one day early.
  • Crediting Interest Revenue for the full term at maturity when part of it was already accrued last year. Credit Interest Receivable for the accrued part and Interest Revenue only for the current year's days.
  • Writing off a dishonoured note immediately as a bad debt. A dishonoured note goes back to Accounts Receivable at its maturity value; it is written off only if collection later fails.
  • Recording Sales or another revenue when an overdue account is converted to a note. Nothing new was sold; the debt just changes form.

Flashcards 8

Promissory note
Maker
Payee
Interest formula for a note
+ 4 more

Practice

1
What is the interest on a $12,000, 90-day, 8% note? Use a 365-day year and answer to the nearest cent.
$
2
What is the maturity value of a $5,000, 60-day, 6% note? Use a 365-day year and answer to the nearest cent.
$
3
A 90-day note is dated October 15. What is its maturity date?
4
A $9,000, 6% note is dated November 16. How much interest should be accrued at December 31? Use a 365-day year and answer to the nearest cent.
$
5
A customer's overdue $3,000 account is converted to a 60-day note. What is the entry?
6
A note's maker fails to pay at maturity. Which account is debited?
7
Match each term to its meaning.
Maker
Payee
Principal
Maturity value
8
A 90-day note is accepted on November 1 by a company with a December 31 year end. Put the entries in order.
  1. 1Dr Interest Receivable, Cr Interest Revenue
  2. 2Dr Notes Receivable, Cr Accounts Receivable
  3. 3Dr Cash, Cr Notes Receivable, Cr Interest Receivable, Cr Interest Revenue
9
What do you call a note whose maker pays the maturity value on time?

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