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Discounts on Notes Receivable

Moneyzine Editor
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Moneyzine Editor
1 mins
January 16th, 2024
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Discounts on Notes Receivable

Definition

The financial accounting term discounts on notes receivable is used to describe a contra asset account that holds unearned interest that was included in notes receivable.

Explanation

A promissory note is an unconditional promise to repay a pre-defined sum of money at a future point in time or on demand. The maker of the note (borrower) is charged interest for the use of that money.

A note receivable is an asset and is recorded on the company's books at face value; even if the note charges the borrower interest. When this note is repaid, the borrower will pay both the face value of the note (notes payable) as well as interest due (interest revenue).

A company may decide to sell their promissory notes to a financial institution or a bank. Depending on the prevailing interest rates and the rate charged the borrower, the company may receive more or less than the face value of the note. The contra asset account, discounts on notes receivable, is used to correct for the difference between the face value of the note receivable and the proceeds received from the sale of the note.

Related Terms

  • Contra Account
    Contra Account
    A contra account is a balance sheet account that is used to offset a related asset, liability, or equity account. Contra accounts are used to ensure the proper valuation of these items is reflected on the balance sheet.
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  • Assets
    Assets
    The accounting term used to describe an economic resource, which is owned by the corporation and expected to provide future benefits to its operation, is asset. Appearing on the balance sheet, assets are typically broken down into two categories:
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  • Notes Receivable
    The financial accounting term notes receivable refers to the obligations of a customer that is in the form of a promissory note, which is a written promise to pay a fixed sum of money to the company. Notes receivable appear on the balance sheet as a current asset.
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  • Recognition of Notes Receivable
    The term recognition of notes receivable is used to describe the process of acknowledging the existence of a notes receivable on the balance sheet of a company. Accounting practices dictate that companies record notes receivable using the present value of all future cash flows.
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