Notes receivable are formal, interest-bearing promises to pay, often replacing accounts receivable for legal strength or delayed payment (e.g., Marvin White’s $60,000 note). Interest = Principal × Rate × Time (e.g., $200,000 × 6% × 4/12 = $4,000). Accounting:
Acquisition: Dec. 1, 3-month, 6% note (Notes Receivable debit $60,000, Accounts Receivable credit).
Accrual: Dec. 31, 1 month’s interest = $60,000 × 6% × 1/12 = $300 (Interest Receivable debit, Interest Revenue credit).
Collection: Mar. 1, $60,900 total ($60,000 principal + $900 interest; $300 prior year, $600 current) (Cash debit $60,900, Notes Receivable credit $60,000, Interest Receivable credit $300, Interest Revenue credit $600).
Default: If unpaid, transfer to Accounts Receivable ($60,900 debit, Notes Receivable credit $60,000, Interest Revenue credit $900).
Interest revenue splits across periods based on time, enhancing liquidity and income, with notes tracked in one account at face value.